Payroll and Tax Accountants of the OT...Question for you (2024)

Posted on 8/16/24 at 8:08 am

Posted by sidewalkside

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This is NOT political.

But since the topic of "not taxing tips" has been mentioned a lot recently, how does the IRS differentiate between what is considered a "tip" and what is a salary? Is it simply who pays the tip (ie the employer or someone else)

To go further I ask is what differentiates a "bonus" from a "tip"?

Take the scenario below for example...yes this is outrageous but just a strawman for discussion.

Assuming a bill is passed and you have an employee who previously was paid $100,000 salary, What would prevent an employer from saying that employees new salary is $1 and he was "tipped" $99,999...and therefore does not owe taxes on that $99,999?

Posted by tigeralum06

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Posted on 8/16/24 at 8:09 am to sidewalkside

Posted by BayouBandit24

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Posted on 8/16/24 at 8:10 am to sidewalkside

quote:
Assuming a bill is passed and you have an employee who previously was paid $100,000 salary, What would prevent an employer from saying that employees new salary is $1 and he was "tipped" $99,999...and therefore does not owe taxes on that $99,999?

Big Brain

If this passes, the actual laws will be more detailed than just saying “no tax on tips.”

Posted by Jcorye1

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Posted on 8/16/24 at 8:13 am to sidewalkside

Posted by StanSmith

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Posted on 8/16/24 at 8:14 am to sidewalkside

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Posted on 8/16/24 at 8:17 am to sidewalkside

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Posted on 8/16/24 at 8:17 am to sidewalkside

Posted by el Gaucho

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Posted on 8/16/24 at 8:19 am to sidewalkside

You have to pay your taxes

Think how many underprivileged people won’t be able to get their crab legs if you don’t

Posted by jclem11

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Posted on 8/16/24 at 8:21 am to sidewalkside

The rules and definitions of a tip will be stringent. You won't be able to say $1 salary and $99,999.00 is a "tip".

It is the same as the difference between employee and contractor. You can't just call everyone a contractor to avoid the employment taxes as an employer.

The reality is this whole conversation is just campaign trail bluster to win votes. It won't pass.

Posted by Styxion

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Posted on 8/16/24 at 8:21 am to sidewalkside

quote:
What would prevent an employer from saying that employees new salary is $1 and he was "tipped" $99,999...

The salary of an employee is deducted out of the income for the business owner, which lowers the business' tax burden. There would be no incentive for the employer to do this since his own business tax would increase.

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Posted by Odysseus32

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Posted on 8/16/24 at 8:23 am to sidewalkside

Because the law written is not necessarily the law interpreted.

There is currently an epidemic of people out there on social media who give “tips” for tax avoidance based on the way the law is written and it doesn’t work that way in a practical sense.

What stops someone from doing what you said is common sense. I’m not sure the wording of the law but I’d imagine the terms reasonable, necessary, ordinary, are in there. Those terms arent in there for the taxpayer to decide, it’s for the person making the call if things get muddy.

Posted by jclem11

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Posted by TigerSaintInDallas

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Posted on 8/16/24 at 8:58 am to sidewalkside

I’ve never worked in an industry with tips. But, I assume that currently, tips are taxed the same as regular wages, at least in theory.

In payroll softwares, you can mark something as “regular wages” or as “commissions,” “bonuses,” etc. The payroll software will automatically withhold bonuses at a higher rate than wages for you, just as an example.

This would be how it’s implemented. The payroll software will now have a new category that says “tips” that won’t withhold taxes from an employee’s paycheck.

This will need to be auditable, since employees will be highly incentivized to run their compensation through tips for the tax benefits. But the payroll softwares usually work decently enough where this shouldn’t be a big issue.

This post was edited on 8/16/24 at 9:00 am

Posted by yellowfin

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Posted on 8/16/24 at 9:01 am to sidewalkside

You don’t need a tax accountant to answer this, just Google

quote:
Tips include: • Cash tips received directly from customers. • Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method. • The value of any noncash tips, such as tickets, or other items of value. • Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangement.

Basically if it comes from your employer, it’s not a tip

Posted by Mid Iowa Tiger

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Posted on 8/16/24 at 9:08 am to sidewalkside

Tips are generally paid directly from the person receiving service to the frontline person performing the service.

POS machines already have the coding built in for recognizing tips from the sale.

For example you go to a restaurant and spend $250 on dinner and leave a $100 tip because the service was outstanding.

When the restaurant runs the final numbers the pos software knows $250 is revenue for the restaurant and $100 is tip to the server. The server will also be on the clock making their menial wage which is from the employer.

If on the other hand, you close out your $250 bill at $250 and leave a $100 bill for the tip the POS system automatically calculates a tip of $25 to the server (10% is the minimum tip a server can claim - or used to be). In that case the server already is getting $75 tax free by lying to the IRS.

If on the other hand you are a cheap bastard and leave no tip the server still has to claim the $25 minimum.

Posted by Purplehaze

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Posted by CleverUserName

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Posted on 8/16/24 at 9:22 am to sidewalkside

Tips and income are reported as two separate income amounts. The tips are reported separately to the government via the Form 941. It’s also seperated in the accounting of the business and wage reporting to the worker.

Wouldn’t be hard to separate. But the 1040 will have to be tweaked.

Posted by AUFANATL

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Posted on 8/16/24 at 9:24 am to sidewalkside

My guess is they will treat it as a "gift". Under the current law, you can give an individual up to $17,000 per year without tax implications as a gift and there is a near zero chance one person will tip a server more than that per year. Anything more than that and they assume you are trying to skirt income and estate taxes.

Back when people left cash on the table this wasn't an issue because servers just underreported. But now that everything is done with credit cards there is a paper trail so they have to report all of their tips.

Also, any blowback over everybody suddenly asking for a tip at the register is moot because they all started doing this during Covid anyway.

Posted by jchamil

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Posted on 8/16/24 at 9:27 am to sidewalkside

quote:
Assuming a bill is passed and you have an employee who previously was paid $100,000 salary, What would prevent an employer from saying that employees new salary is $1 and he was "tipped" $99,999...and therefore does not owe taxes on that $99,999?

No one at the IRS would ever see through that

Posted by baldona

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I'll explain any possibility of this as someone that worked in restaurants.

The Point of sale software that restaurants use tracks both accounting and food inventory as well as ordering of food, etc. When we would cash out at the end of the night we'd make an invoice or receipt of our evening with our sales, cc sales, cash sales, etc.

Many of them assume a certain percentage of tips, and make you turn in some cash for taxes. So something like a 10% tip for all cash sales were to be reported as income. Then it would also report all CC tips.

Its laughable you people think the IRS would allow anything wild to happen.

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