Tipped Employees

This is not about whether one should or should not tip. This is about what tipped employees are paid. Specifically restaurant servers.

According to the FLSA Fact Sheet #15:

If an employee's tips combined with the employer's direct wages of at least $2.13 an hour do not equal the minimum hourly wage of $7.25 per hour effective July 24, 2009; the employer must make up the difference.

In discussions on whether to tip or not to tip, I see comments such as this one from a discussion board.

Servers are required by the IRS to claim every penny earned in tips and to pay taxes on that, which pretty much takes care of the $2.13 hourly wage. Almost every server I know gets a "VOID" paycheck.

I'm curious why they are ending up with a $0 paycheck. They should be making at the very least minimum wage with or without tips.

Another clip from the FSLA Fact Sheet #15

Retention of Tips: The law forbids any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. A tip is the sole property of the tipped employee. Where an employer does not strictly observe the tip credit provisions of the Act, no tip credit may be claimed and the employees are entitled to receive the full cash minimum wage, in addition to retaining tips they may\should have received.

Since taxes are a percentage of what is made, they shouldn't end up with $0.

What am I missing?

Never worked as a server, so what I have to say is only based on what I've heard other servers say, but I think I have an explanation.

At least in some states, servers are theoretically required to report the amount of their tips to their employers, who then withhold based on the total of tips plus hourly wage. If they earn enough in tips, the total amount of withholding for all taxes, federal, FICA, SS and state, if any, could easily amount to more than the $2.13 they earn hourly. (BTW, that $2.13 is a federal minimum, some states require a higher amount than that.) In such circumstances, the check the employee receives would be zeroed out, but it should reflect the withholdings that the employer makes on the employee's behalf.

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Ridicule is the only weapon which can be used against unintelligible propositions. Ideas must be distinct before reason can act upon them; and no man ever had a distinct idea of the trinity. It is the mere Abracadabra of the mountebanks calling themselves the priests of Jesus. -- Thomas Jefferson

For we know that our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus -- and non-believers. -- Barack Obama

We see monsters where science shows us windmills. -- Phat

quote:

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At least in some states, servers are theoretically required to report the amount of their tips to their employers, who then withhold based on the total of tips plus hourly wage. If they earn enough in tips, the total amount of withholding for all taxes, federal, FICA, SS and state, if any, could easily amount to more than the $2.13 they earn hourly. (BTW, that $2.13 is a federal minimum, some states require a higher amount than that.) In such circumstances, the check the employee receives would be zeroed out, but it should reflect the withholdings that the employer makes on the employee's behalf.

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Yes, I realize that states can vary.
Table of Minimum Hourly Wages for Tipped Employees, by State

So the employee is taking the cash tips home and the total taxes are then taken out of what the employer pays them. That would explain the comment that one person made concerning owing more taxes at tax time. (I think it was on that same discussion page.) If they made enough to owe more taxes than the 2.13 per hour would cover, they would then owe those taxes at the end of the year.

If that is true, then getting a $0 check doesn't mean they didn't bring home any money.

Now if they didn't get any tips, then their employer would need to make up the difference and then their paycheck should be like non-tipped employees. If they didn't make enough tips, then the check should adjust accordingly.

Edited by purpledawn, : Added table link

Now if they didn't get any tips, then their employer would need to make up the difference and then their paycheck should be like non-tipped employees. If they didn't make enough tips, then the check should adjust accordingly.

Correct. And, they probably wouldn't remain in that job for long unless that situation changed substantially.

subbie writes: At least in some states, servers are theoretically required to report the amount of their tips to their employers, who then withhold based on the total of tips plus hourly wage. If they earn enough in tips, the total amount of withholding for all taxes, federal, FICA, SS and state, if any, could easily amount to more than the $2.13 they earn hourly. (BTW, that $2.13 is a federal minimum, some states require a higher amount than that.) In such circumstances, the check the employee receives would be zeroed out, but it should reflect the withholdings that the employer makes on the employee's behalf.

As a waiter, I just want to confirm that you are spot on.

-Meldinoor

So wait staff make at least the Federal Minimum wage of $7.25 per hour (varies by state) for non-tipped employees when the Federal Minimum wage of $2.13 per hour (varies by state) for tipped employees is combined with their tips. Is that correct?

Wow! Doesn't this mean that we are not actually tipping the waiter? We are just tipping the restaurant owner or employer (by reducing the wages he has to pay to the waiter by the amount that we tip)?

No no no! Please tip. Especially if you happen to be eating at the Edelweiss Restaurant in Colorado Springs.

The servers receive the tip, but it is of course taxable income. So the restaurant records the amount of tip made by the employees so that it can withhold taxes from their paychecks. That way servers can simply take their tip home right away instead of having to worry about tax. Tipping is very important, because our wages are so low.

-Meldinoor

I'm not entirely sure on that one. The restaurant I work at is pretty expensive, so situations where we make less than minimum wage in tips are rare. I'd have to ask my boss about that.

-Meldinoor

Wow! Doesn't this mean that we are not actually tipping the waiter? We are just tipping the restaurant owner or employer (by reducing the wages he has to pay to the waiter by the amount that we tip)?

Look at it this way:

If the employer had to pay a reasonable wage, they would just add that cost to the menu prices, passing it on to the consumer anyway. Plus, not only would they have to pay more in wages, that would also increase the amount they would have to pay for their share of the contribution to SS benefits. Instead, the servers end up having to pay that amount themselves. So, this arrangement saves the consumer at the expense of the server. And that's not even taking into account that the consumer payment is voluntary to begin with.

I am curious about one thing: how do servers feel about customers who stiff on tips because of bad service?

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Ridicule is the only weapon which can be used against unintelligible propositions. Ideas must be distinct before reason can act upon them; and no man ever had a distinct idea of the trinity. It is the mere Abracadabra of the mountebanks calling themselves the priests of Jesus. -- Thomas Jefferson

For we know that our patchwork heritage is a strength, not a weakness. We are a nation of Christians and Muslims, Jews and Hindus -- and non-believers. -- Barack Obama

We see monsters where science shows us windmills. -- Phat

subbie writes: I am curious about one thing: how do servers feel about customers who stiff on tips because of bad service?

If the service was obviously bad it's usually ok. I'd much rather they tipped poorly than complained to management. (Not that I give bad service, but everyone has their bad days)

The worst case is when the service is good, and the customers are obviously happy, but they still stiff the tip. Some people think they can make up for a bad tip by being really nice to the server and complimenting on the service. Not true. I'd take rude customers who tip well over friendly cheapskates any day.

-Meldinoor

Edited by Meldinoor, : Better subtitle

Since taxes are a percentage of what is made, they shouldn't end up with $0. What am I missing?

That's a great question, because when I used to be a server and barback, my paychecks were usually voided too, making tips your sole means of income.

I wish I could tell you, because I have questioned the same thing concerning percentages.

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"Political correctness is tyranny with manners." -- Charlton Heston

I am curious about one thing: how do servers feel about customers who stiff on tips because of bad service?

For an average experience, I usually tip 15%. That's my average for neither a superperb job or a terrible job.

As someone who has been on both sides of the isle, I believe in tipping well for a job well done. The quicker you get my food or drinks, the less you screw up my order, the more attentive you are (without obnoxiously hovering) the more your tip increases. Being a great server or effective bartender is a skill, requiring excellent interpersonal skills and time management. I have no problem compensating well beyond 15% for an excellent job.

Inversely I have no moral qualms, however, not tipping for atrocious service. I have only not tipped whatsoever maybe 5 times in my life. You have to seriously fuck up for me to do that, but it is not beneath me to do so based on their service (or lack there of, really).

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"Political correctness is tyranny with manners." -- Charlton Heston

quote:

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That's a great question, because when I used to be a server and barback, my paychecks were usually voided too, making tips your sole means of income.

I wish I could tell you, because I have questioned the same thing concerning percentages.

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From what I have learned so far, the taxes can only be taken out of what the employer pays since tips are taken home. Since both are considered as income, if you made enough in tips and wages, then the taxes will probably exceed the wages paid by the employer, which explains the $0.

Did you end up owing taxes at tax time?

Hypothetically: If you were to give the employer all your tips to hold and then at the end of the week or two weeks, the employer wrote a check for the total of the two (wages and tips) minus taxes, then you wouldn't have a voided check and shouldn't owe taxes at the end of the year.

From what I can see, waiters aren't any worse off than non-tipped employees getting the standard minimum wage (not restaurant minimum). (I'm not talking about buying health insurance, etc. Many people have that problem also who make minimum wage.) The setup is more complicated though.

If compared to a normal minimum wage person at $7.25. The waiter actually gets to take home more pay since the employer apparently can't take more than the wage he pays unless the employee makes more funds available.

Publican 15 You are permitted to establish a system for electronic tip reporting by employees. See Regulations section 31.6053-1(d). Collecting taxes on tips. You must collect income tax, employee social security tax, and employee Medicare tax on the employee's tips. If an employee reports to you in writing $20 or more of tips in a month, the tips are also subject to FUTA tax. You can collect these taxes from the employee's wages or from other funds he or she makes available. See Tips treated as supplemental wages in section 7 for more information. Stop collecting the employee social security tax when his or her wages and tips for tax year 2010 reach $106,800; collect the income and employee Medicare taxes for the whole year on all wages and tips. You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the limit. You are responsible for the employer Medicare tax for the whole year on all wages and tips. File Form 941 or Form 944 to report withholding and employment taxes on tips. Ordering rule. If, by the 10th of the month after the month for which you received an employee's report on tips, you do not have enough employee funds available to deduct the employee tax, you no longer have to collect it. If there are not enough funds available, withhold taxes in the following order. 1. Withhold on regular wages and other compensation. 2. Withhold social security and Medicare taxes on tips. 3. Withhold income tax on tips.

So it looks like income tax is the last to come out if there is enough money left. That's why I wondered if you ever owed at tax time.

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Scripture is like Newton’s third law of motion—for every action there is an equal and opposite reaction.
In other words, for every biblical directive that exists, there is another scriptural mandate challenging it.
-- Carlene Cross in “The Bible and Newton’s Third Law of Motion”

This bill has is in committee right now. It will be interesting to see if it goes through.

Summary 5/21/2009--Introduced. Working for Adequate Gains for Employment in Services Act or WAGES Act - Amends the Fair Labor Standards Act of 1938 (FLSA) to establish a base minimum wage for tipped employees of at least: (1) $3.75 an hour beginning 90 days after the enactment of this Act; (2) $5.00 an hour beginning July 1, 2011; and (3) beginning on July 1, 2012, and adjusted as necessary thereafter, 70% of the wage in effect under FLSA but in no case less than $5.50 an hour.

They might as well just stop differentiating between tipped and non-tipped employees when it comes to minimum wage (if this bill even has a chance of getting to the floor).

Raising the tipped employee minimum would help to cover more of their taxes during the year. Of course those who do this type of work for many years would know what's coming at the end of the year and would hopefully prepare.

With Minimum Wage Set to Rise, Tipped Employees Seek Their Share On Thursday, NELP issued a report documenting what it called "years of neglect" for tipped employees, who have been forced to get by with poverty-level incomes. According to the report, waitresses and waiters -- the largest group of tipped workers -- have nearly three times the poverty rate (14.9 percent) of the workforce as a whole. Tipped workers earn a nationwide median wage of $8.23 per hour, or just $17,118 annually, including tips, according to NELP analysis of the Current Population Survey.

I only make $8 per hour. Of course the $17,118 is based on working 2080 hours a year (40 hours a week, 52 weeks a year). From what I can tell wait staff don't usually work 40 hours a week. Do wait staff ever work a full 2080 hours a year?

Apparently in 1966 the tipped employee minimum was to be a percentage of the non-tipped minimum wage, but the employer was not required to bring them up to the minimum wage if tips weren't enough.

Subminimum Wages for Tipped Employees The federal tip minimum varied from 40% to 50% of the minimum wage until 1996, when Congress froze it at half of the then-current minimum wage of $4.25 and added the requirement that if an employee’s average tips did not bring the total wage up to the minimum, the employer would make up the difference. The federal tip minimum has remained at $2.13 ever since, even though the federal minimum wage itself has reached $7.25.

So only since 1996 were employers required to make up the difference, but they also froze the tipped minimum.