Tax Deductions on Tip Outs for Waiters

Tax Deductions on Tip Outs for Waiters
••• Jupiterimages/ Images

When you work as a waiter, there may be restaurant policies for “tipping out” support staffers like bartenders, hostesses or table bussers who help you do your job. Even though a tip may come directly to you and be considered taxable income, you can deduct the amount you pay to others in tips out when tax time rolls around.

Keep Good Records

Keep written records of all your tips, both cash tips and tips left on credit cards or via check. Report tips to your employer every two weeks unless you earn less than $20 in a month, in which case you’ll have to track and report your own income on your tax return. Giving your employer your numbers lets him accurately pay your Medicare, Social Security and other required taxes. The figure you give your employer should include your total tip income, even if you tip out other employees. Keep track of who you tip out and how much you give them, because you can deduct this from your own taxes when you file.

When You Get Tipped Out

Even though you, as a waiter, are more likely to tip out support staff than be tipped out yourself, if you’re part of a tip-sharing pool, or you get a little extra something from colleagues you help out, you need to report that as income as well. Your fellow staffers are likely recording the transaction for their own deductions, so it’s important that you document the money trail as well.

Failure to Report

If you under-report your tip income, or over-report the amount of money you tip out to fellow employees, it can catch up with you. If you’re audited, or have your tax return selected for closer scrutiny, the U.S. Internal Revenue Service will want to see your records. If your records are sketchy or incomplete or appear to fall outside the norm for reporting in your industry, you could be penalized. This can mean fees, interest and other charges.

Benefits of Accurate Reporting

In addition to it being a legal requirement that you report all tip income, accurately reporting your earnings can help you establish good financial management skills. If you decide to make a major purchase, like a house or a car, being able to prove your income through tax returns and accurate records can make the process easier. Knowing how much you earn can also help you budget, save and allocate your income wisely.