united-states employment labor-law irs
Is it legal for a restaurant to assume tips on cash payment?
<p>A friend recently posted that,</p>
<ul>
<li>She is a waitress that receives tips.</li>
<li>Her restaurant has a POS machine.</li>
<li>This POS machine assumes a 15% tip on all cash payments. She can not alter this setting.</li>
</ul>
<p>Because the tax liability is on the waitress the only value I can see in the restaurant forcing this on her is to mitigate the likelihood of triggering an audit. This seems to amount to the theft of wages for a service to mitigate the establishment triggering an IRS audit, does this satisfy a claim to wage theft?</p>
<p>It creates a situation where wait staff can actually be forced to pay income tax on unearned wages.</p>

<p>The difficulty is that tips are, by statute, considered a form of wages rather than a form of self-employment income for the tipped employee for income tax purposes (in contrast, employers don't have to keep track of tips for minimum wage purposes, tipped employees just have an extremely low minimum wage+). (If it was self-employment income, withholding and paying self-employment tax which is paid in lieu of FICA taxes, would be solely the employee's problem and none of the employer's business.)</p>
<ul>
<li>A comment notes, probably correctly, that:</li>
</ul>
<blockquote>
<p>If wages plus tips do not add up to the full regular (non-tipped)
minimum wage, the employer must pay the difference. This is not
well-enforced, however.</p>
</blockquote>
<p>So, employers have a duty to report to the IRS and withhold taxes from their best estimate of combined wages and tips in a manner authorized by IRS regulations. If they don't, the employers face stiff penalties from the IRS for failing to withhold taxes.</p>
<p>There are tax regulations and other forms of official guidance governing when it is permissible to infer tips on cash payments in this fashion.</p>
<p>It isn't truly &quot;wage theft&quot;. The employee still gets whatever the actual tip is, and the employer still doesn't get the tip itself.</p>
<p>Instead, what the employer does is withhold taxes for the benefit of the employee (and with respect to FICA an equal share of employer obligations withholding) based upon estimated wages and tips combined.</p>
<p>The income tax withholding is annually reconciled (in theory anyway) against actual taxes owed on the annual tax return. If you maintain good records, you might get audited, but you'd probably win. If you maintain sloppy records or don't keep track at all, you'd probably lose in an audit.</p>
<p>To reconcile the error in income tax reporting in federal tax law, the waiter files a 1040 with the W-2 from the employer. The waiter reports the amount withheld in one box. The waiter reports the correct amount of wages and salary and tips rather than the incorrect amount in the wage and salary box. The waiter files a supplement to the tax return page explaining the that W-2 is inaccurate. The waiter calculates tax and shows entitlement to a refund, and the IRS either writes a check or audits after which the IRS or if there is no agreement the tax court decides who is right. Cash tips should be logged daily by the waiter and regularly deposited. (I've done this before personally, with success in the audit process, in cases of erroneous 1099s for my personal taxes.)</p>
<p>Reconciling errors in FICA withholdings is rather more difficult, but erroneous overwithholding still provides a benefit to the employee, and the employee's survivors, in the long run in that case. This is done in the form of larger Social Security benefit checks that are based on the inflated wage and tip estimate and the actual FICA taxes paid.</p>
<p>If the employee actually receives more cash tips than reported by the employer and doesn't correctly increase the amount in a tax return, the tipped employee is actually engaged in petty tax evasion (and, in practice, excess cash tips are rarely reported).</p>
<p>The circumstances under which a fixed percentage may be properly set and what it should be are too technical for an answer here.</p>
<p>Systemically, the problem with the applicable regulations is that the inferred tip percentage is benchmarked against the tips paid on credit card payments, per IRS guidance and permission, but actually, customers tip at lower percentages of the bill when paying in cash than when paying via credit card.</p>
<p>This is a flaw in the law, but it doesn't represent impropriety on the part of the employer.</p>
