Reflections on tip wages and taxes

Reflections on tip wages and taxes

One topic being discussed in the presidential race is the taxation of tip wages. Some of us old-timers remember a time when tips were not taxed at all simply because they were not reported by those who received them. 

In my early years as a food service manager I learned there is an exception to the so-called "minimum wage" which creates a double incentive for both employers and employees to avoid taxes simply by not reporting them. 

The way that works is that employees working for tips must receive a legally mandated minimum hourly wage in case they fail to receive any tips. The so-called "tip wage" varies from state to state, but the arithmetic is basically the same. The illustration above explains how that works. Employers receive a "tip credit" for the difference and the employee is taxed on the rest. At the end of the tax year, the employee's 1099 reflects 100% of earned taxable income to be paid by the employee.

What a deal! The employer gets loads of business from happy customers and the service staff pays taxes on the actual selling price received from the public. 

In the old days smart employees understood the system. Only they knew how much money they were receiving in the form of tips, so it was their responsibility to report that amount so their employer could receive that tip credit for tax purposes. Anything over that amount was also supposed to be reported to the employer so that their W-2 accurately reflected their taxable income. But who in their right mind wants to pay more taxes? What about profits from yard sales? Income from flea markets? Local vendors peddling crafts or snacks on the sidewalk?

You know where this is going.

Comes now Uber, Lyft and a load of other "service" businesses which have always been an important part of the economy. I once read that the word tip was an abbreviation for To Insure Promptness. In any case, as the service industry grew (and yes, it is now an industry) the corporate sector continued to receive the ever-growing so-called "tip credit". The end product in many cases has become a service sold to the public using virtually nothing more than an accounting exercise. The principle "investment" for many so-called "service"businesses is crafting documents outlining a business plan, replete with market surveys, advertising strategy, financing arrangements and legal documents tying the whole package together with the expectation of hitting the jackpot when another IPO hits the market.

The days are long gone when tips were actual currency received by whoever rendered a service. Thanks to the magic of electronic transfers of financial transactions, there is now a paper trail.

 

Back now to "No taxes on tips".

I'm just an old cafeteria manager well into retirement, virtually ignorant about the ramifications of both accounting and legal matters. These reflections are simply my way of thinking out loud. I knew when I retired early I would have to find a job with health insurance and to that end I actually got a CDL in order to become a bus driver for my wife and myself, expecting to be insured by the school system. I was so sheltered during my years of service that I knew nothing about PTO or shift differential, both of which were routine features of the hospital where I became a "team leader" in the dining room of a retirement facility. 

At this point I'm simply waiting to see what becomes of this latest appeal for votes during a presidential election. My guess is that the ignorance of the voting public will simply add this new trope to the list of ignorant discussions already under way so there is no need for me to add anything more.

I just wanted  to get this much on the record for future reference.