Are tips gifts or compensation?

[Quixote]

From a thread on R&R:

Nikki wrote:

BTY: Did anyone notice Paul's latest bill introduced into the legislative hopper? He wants to abolish the income tax on tips, since tips aren't income -- they're gifts.

Judge Roy responded:

Not to hijack a thread, but I agree with the concept.

1) Tips are paid in exchange for services rendered or to encourage good service in the future. If someone walked in off the street, tossed money in the tip jar and left, never to return, that would be a gift.

2) If tips were gifts, Paul's bill would be unnecessary, because gifts are already exempted from gross income. No legislative change would be necessary.


Edited to clarify who said what.

[Demosthenes]

I view the tip as a work bonus.

[Nikki]

It's hardly a "work bonus" when employers of people such as waiters/waitresses are exempted from minimum wage laws because the tips are such a substantial part of their employees' income.

[Demosthenes]

They aren't doing the work for the employer, they're doing it for me which is why I'm paying them. It most definitely ain't a gift.

[Imalawman]

They aren't doing the work for the employer, they're doing it for me which is why I'm paying them. It most definitely ain't a gift.

I agree, I don't see why its not "compensation for services"? In my college days, I provided a service for which I was compensated according to the quality of the services I rendered. If I didn't provide the service I wasn't compensated.

But, I've never seen the validity in any of the arguments against taxing tips. So maybe the whole debate is lost on me.

Minor point of disagreement - IMO, Servers are definitely working for the employer - which is why they're called an employee and why they're all paid by the employer. After all, a sit-down restaurant could hardly function without them. However, you make a good point that servers don't work solely for the employer but also provide a service to the customer for which the customer pays.

[webhick]

Tips offset the lower minimum wage that servers get. They only get $2.38/hour where the minimum wage (at least in this state) is $5.85.

Additionally...
Why should the bitch who demands a 15% tip for shitty service (bothering me incessantly, trying to take my plate away 10 minutes into serving while I'm still eating, screwing up my order three times, etc) not have to pay taxes on that 15%? For that matter, how about the waitress who is damned good at her job, who earns $300 a night in tips 5 days a week not pay in on that?

If Paul turns tips into gifts, waitresses will have to start getting paid $7+ per hour and certain restaurants will have to ditch their mandatory tip policy. And then no one tips waitresses anymore. Plus, a short-term poor scheduling problem in a restaurant (read overstaffing before the trend is seen) could potentially bankrupt the business. And, restuarants will use the amount of tips earned to see which servers are worth keeping around in the long term. If they don't have that, they have to rely on customer comments, which we all know doesn't get said unless the service is *really* bad.

[Judge Roy Bean]

...

2) If tips were gifts, Paul's bill would be unnecessary, because gifts are already exempted from gross income. No legislative change would be necessary.

The primary reason tips can't be considered gifts is they've been defined as income by the tax code. It's simple way to reduce some of the tax burden off a large number of working-class people and reduce a paperwork headache for their employers.

They aren't doing the work for the employer, they're doing it for me which is why I'm paying them. It most definitely ain't a gift.

Actually, you'll find in most establishments that the tips are pooled and then spread among the waitstaff, bartenders, hostess, etc., by the employer. And since most people use plastic when they dine out, the employee never sees a dime until the paycheck comes out.

Don't forget - the customer isn't compelled to pay a tip. It's an option. There is no theft of services for walking out and not tipping as there would be for not paying for the food.

Worse yet, the calculation of tips is made for tax purposes whether or not a tip is paid.

[webhick]

Actually, you'll find in most establishments that the tips are pooled and then spread among the waitstaff, bartenders, hostess, etc., by the employer. And since most people use plastic when they dine out, the employee never sees a dime until the paycheck comes out.

We've done the books for many restaurants (and of that, many were started before we came on board), and I've only heard about that happening rarely. Usually when the owner is stealing half the tips from the tip jar because it's going under.

CC tips are removed from the till when the waitress cashes out her drawer. You'll notice that most POS systems cash out for the waitress offset the cash in the "drawer" by the amount of credit card tips. And for the record, it's against federal labor laws to remove the merchant fee from tips. I know because NetPOS tried to offset waitress tips by 2% to account for the merchant fee (feature request by a restaurant operator), and I called the labor board to find out if it was legal and they said it was wasn't.

Don't forget - the customer isn't compelled to pay a tip. It's an option. There is no theft of services for walking out and not tipping as there would be for not paying for the food.

Actually, they are. I've been in a restaurant that have a mandatory tip policy that puts the 15% right on the check (on a standard table, not a function or event). They didn't let me leave until I paid the whole thing. Didn't matter that the waitress was lousy. Also, if you book a function in many restaurants, there is a standard mandatory gratuity of 15% tacked right onto the bill. I've seen people try to get away without paying that (because there was no contract) and they lost every time.

All that being said, only scum doesn't tip on a decent+ service.

[Imalawman]

Actually, you'll find in most establishments that the tips are pooled and then spread among the waitstaff, bartenders, hostess, etc., by the employer. And since most people use plastic when they dine out, the employee never sees a dime until the paycheck comes out.

I wouldn't say in most restaurants have tip pools, only a few have a true tip pool for everyone. Most have a pool for the bartending staff and runners. But most actually allow a server to keep his/her tips aside from the excise for the other help.

As far as not seeing a dime until payday - In all the restaurants I've ever worked at (I was a server for 6 years) we got paid out credit card tips that night. Usually, you add up your totals for the night, which includes making sure you've paid all your cash tabs for the night and what's left over is your take-home for the night. If you've only had credit cards and not cash, the manager will give you cash equal to your credit card tips. This was true at every level I worked - even at the 5 star restaurant that I finished my server career at. In fact, I've never heard of a place that made you wait until payday to receive your credit card tips.

In any event, I still don't see how that makes tips a gift.

[Quixote]

Don't forget - the customer isn't compelled to pay a tip. It's an option. There is no theft of services for walking out and not tipping as there would be for not paying for the food.

The customer isn't compelled by law to give a tip, but he is compelled by custom. I suspect that the social obligation to tip would have become a legal obligation centuries ago but for the socio-economic class of most tip recipients.

[gottago]

What about situations (like casinos) where the patron is given something for free (a cocktail) and may reward the server at their discretion with a tip. It is not required and can not possibly be tracked by the business. Hmmmmmmmmmm...

Additionally, many bands, tour operators, personal care providers (hairstylists, nail techs, spa, etc.), airline porters, cab drivers and others routinely receive tips that are not distributed through the business. Are these gifts or wages? They make a helluva lot more per hour than servers. When we lived in Las Vegas, there was a tip jar at the dry cleaner's.

Food and beverage servers unfortunately get tagged with the mandatory reporting but many others receive tips and I would expect very seldom report them.

[Famspear]

gottago wrote:

What about situations (like casinos) where the patron is given something for free (a cocktail) and may reward the server at their discretion with a tip. It is not required and can not possibly be tracked by the business. Hmmmmmmmmmm...

Additionally, many bands, tour operators, personal care providers (hairstylists, nail techs, spa, etc.), airline porters, cab drivers and others routinely receive tips that are not distributed through the business. Are these gifts or wages? They make a helluva lot more per hour than servers. When we lived in Las Vegas, there was a tip jar at the dry cleaner's.

Food and beverage servers unfortunately get tagged with the mandatory reporting but many others receive tips and I would expect very seldom report them.

All the tips you mentioned are compensation for personal services and are includible in gross income under section 61 - a long winded way of saying that they're taxable. And obviously you're right - a lot of this kind of income never gets reported to the IRS.