Tip for servers: Gratuities are taxable income

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We all have one of those relatives. The great-uncle or cousin or parent who is a skinflint tipper. You cringe when they pay the check, then you feign a trip to the powder room so you can go back to the table and leave the appropriate gratuity.

Some restaurants are getting around the stiffing of their wait staff by doing away with the practice. Their menus note no tipping, and in exchange they charge higher prices.

The no-tipping concept is gaining ground, reports The New York Times. A key reason is that it’s a more equitable way to compensate all employees. Tips to servers are not shared with the kitchen staff, but revenue from certain types of surcharges and higher menu prices can be distributed to everyone.

Plus, notes the Times, in cities like New York tipping is subject to a confusing array of federal, state and local regulations and tax laws. Eliminating it would simplify a business’ bookkeeping and tax tasks.

Tips, even tiny ones, are taxable

It also would make life easier for the wait staff receiving tips. Tips are taxable income and every month that a server receives more than $20 in tips, the worker is supposed to report the amount to his or her employer by the 10th day of the next month.

The tally includes cash tips, as well as those included on a credit card or as part of a tip-sharing arrangement. Nontraditional tips also must be reported. If a customer rewards your service with, say, tickets to a sporting event, the value of those ducats must be reported as income.

Tip reporting obviously requires good record keeping. The IRS suggests that workers use Form 4070A, Employee’s Daily Record of Tips, to track gratuities.

If you do not report tips to your employer or on your tax return, you could face not only the taxes due on the amounts, but also penalties and interest.

Still, it’s a good bet that a lot of cash tips don’t make it onto servers’ 1040s.

Tipping tradition hard to break

That’s why I suspect the IRS, which has worked over the years with the restaurant industry to come up with more accurate ways to report tips, would love it if all restaurants went the no-tipping route.

That might eventually happen — it’s already the norm in many restaurants around the world — but it will be a while before we see widespread no-tipping rules here in the United States.

Many restaurateurs worry that diners will balk at the higher prices even though they wouldn’t have to tip at the end of the meal. There’s also concern that very good servers would leave for places where they could still pocket nice sums from customers for their services.

So don’t look for universal no-tipping policies anytime soon. And have a few bucks handy the next time you go out to eat with your overly frugal relative.

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