So, where do your tips go? Ask the tax man

The Payment of the Tithes (The tax-collector), also known as Village Lawyer, by Pieter Brueghel the younger, (1564-1648). 

 In the final installment of this three-part series, we examine everyone’s favorite topic: income tax. As previously reported, gratuities are considered income for tax purposes, although they are not considered wages. This means that recording and reporting them rests entirely with the individual server.

However, it would be naive to think that any server carefully records and reports his or her gratuities throughout the year. If there is no way to catch someone lying, and that person has no incentive to tell the truth, then guess what happens. They lie.

At the same time, we do well to pause and ask ourselves if we, given the same circumstances, would do any differently. Servers make $1.25 less than anyone else. Yes, this is merely their minimum wage, and hence many servers could make more than that per hour, but the reality (outside a union workplace) is that almost everyone on the floor makes minimum wage.

Colin, with whom I spoke last time, is resigned to making minimum. “My wage is minimum wage and even when they moved the minimum wage up after like twelve years, we still make less because the government knows about the gratuities. They have always known about the gratuities.”

The numbers tell a story

What the government does not seem to know is how much servers make in gratuities. Every server with whom I spoke reported the same number. You report gratuities equivalent to 10% of your wages. This is the number which keeps your tax return moving through the system without raising suspicion. However, let’s take a look at that number.

If you work 40 hours a week, 50 weeks a year, at $9.00 an hour, you make $18,000 per year in wages. The gratuities you report will total $1,800. This works out to about $7.20 per shift in reported gratuities, or $.90 an hour. By contrast, servers with whom I spoke all reported a number between $100 and $150 as what they expect to make over the course of a shift.

There is an obvious gap between those numbers.

The credit question

At the same time, reporting this little income has its drawbacks. If you want to get a mortgage or a business loan, the bank will look at your income level. Colin would like to buy a condo with his fiancée, but getting credit is an obstacle.

“Of course, on paper, I make what I make. I’m in the lowest tax bracket. If I was to be diligent and squirrel away my tips and then walk into a bank with like twenty grand, well I’ve done the work. But if I want to get a mortgage, I still only make nine dollars an hour. They [the bank] know I’m making money, but they can’t go on that.”

Colin gets a refund every year, as do most servers. The drawback is that he cannot get enough credit to make major life purchases. To get around this problem, one of Colin’s friends, a fellow career server, actually decided to report more income.

“I have a buddy who just moved here from France and he and his wife just had a baby boy and they’ve got a mortgage. To get the mortgage, he had to say that he was making more in order to qualify for the mortgage. So he pays every year, but he’s got a mortgage.”

Rules only matter so much

The problem is not that servers aren’t willing to report their gratuities. The problem lies in the culture of the restaurant industry itself. Says Colin, “There are lots of loopholes in this industry, from breaks and lunch hours to sexual harassment and drinking alcohol on the job to basically taking money from the server because of the structure of the tip-out.”

Respect for regulations is low and workers throughout the industry are accustomed to being on the wrong end of a broken rule.

He recalls one case of a busser at his workplace. One day, their boss decided that he wanted to pay her $.75 less an hour. She was understandably upset by this, but did not know how to deal with the problem. She approached Colin, who was reluctant to suggest that she do much about it.

“Is this 75 cents an hour something that, I mean I guess it adds up over the week. But is it something you want to give [the boss] a hard time about which might also cause friction between you two moving forward?”

She did not want to lose her job, nor did she want to explain why she left this job to a prospective employer. She still makes tips and she likes her working environment. Being antagonized by her boss is simply part of the whole picture. In an industry where loopholes abound, scenarios like this play out all the time.

So what is the solution?

Certainly, there is no simple solution. However, one suggestion does come to mind. If we want to accept restaurant workers as professionals and expect them to behave accordingly, then we need to pay them like professionals.

Owners will cry that this will cause them to raise prices in the range 25, even 50 percent. However, this is not clearly the case. There is the example of the Linkery in San Diego, which refused to accept any tip beyond the 18% dine-in service charge. The result? Service improved (although they've since shut down, so maybe a bad example). There is a similar story at New York’s Per Se (which remains open and is owned by the legendary Thomas Keller).

In British Columbia, this money would be considered controlled tips, as it would be disbursed entirely by the employer, who could then make proper deductions.

There is also the long-standing example of Australia, where nobody gets tips but wages are significantly higher and there remains a healthy restaurant industry.

Whatever the solution, one thing remains clear. Within the restaurant industry as it is, there is little respect for the rules and this often translates into a relative lack of professionalism. Even Colin, a thoughtful and professional server if there ever was one, admits to fudging things here and there.

The reality is that it usually comes down to practical issues.

After all, why would you go to the effort to behave professionally when it is not likely to earn you any more money than the next guy? And before you say “because it’s your job” ask yourself: would you make that effort if you knew that it would neither be noticed nor rewarded?

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