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As a waiter/waitress, if I received money from a customer and he/she specifically said that this is not a tip, but a gift, do I need to report it at the end of the night to the restaurant? Do I need to report it on my tax return?

According to the article "An Internal Revenue Service (IRS) spokesperson conceded that he'd never heard of such a situation..."

Dheer
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Michael
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  • 3 answers within 1 minute of each other. Interesting. – JTP - Apologise to Monica Apr 24 '17 at 22:12
  • @JoeTaxpayer I was surprised too. And 2 metaphors! – Michael Apr 24 '17 at 22:13
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    I'm not sure how much weight I'd give to a concept that begins with "taxation is theft" written on the tip line... – quid Apr 24 '17 at 22:16
  • Considering I have known LOTS of servers that don't report all of their tips anyways, this seems more like a personal ethical decision. – D Stanley Apr 25 '17 at 14:32
  • Did they leave the tip/gift in cash or on a card? – Chris Apr 25 '17 at 16:08
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    @Chris It appears that it was cash. – Michael Apr 25 '17 at 16:08
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    I have done both a tip and gift to the same server. It really irks me that I reward a server for a job well done, but they then have to divide it among the busboy, other staff, and sometimes the restaurant, none of which was my intent. So I consider the tip and the gift separate and deliver them separately. – donjuedo Apr 25 '17 at 16:16
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    @MichaelC. You are legally required to report tips above a certain minimum on your taxes; your restaurant may also have rules that say you must report tips. Finger waving over. Personally I would not, and I would be willing to bet at least 70% of servers do not declare cash tips. Not because I believe taxation is theft (I don't), but because when I was working as a server I was a poor college student and needed the money. Your personal situation/morals/risk tolerance may vary. – Chris Apr 25 '17 at 16:16
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    @Chris, this is why servers and bartenders (and other commonly tipped service jobs) are among the jobs with the highest IRS audit rates (in the US anyway). – asgallant Apr 25 '17 at 21:48
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    @asgallant Just out of curiosity, without a paper trail of some sort (e.g. something you wouldn't have with cash tips) what would the IRS hope to accomplish with an audit? –  Apr 26 '17 at 00:52
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    @Michael, I don't know what secret magic the IRS uses to track down unreported, paper trail-less income, but they can probably back-track from expenses (ie, if you have $30k/year in reported income, but $40k/year in traceable expenses, you are probably hiding significant income), or compare your reported income vs your coworkers and other people in similar jobs. The IRS has 150+ years of experience detecting tax evasion, chances are they've seen it all and know exactly how to track down unreported income. – asgallant Apr 26 '17 at 20:28

6 Answers6

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Would a rose smell as sweet if you called it a stench blossom?

Excerpt on gifts from an LBMC article:

The payment must be in the nature of “something for nothing.” It is not a gift if the payment is a reward for services rendered. With regard to payments made by an individual to a service provider, it is difficult to argue that such payments constitute gifts, even when the amounts are paid at the holidays.

You can pretend it's a gift, but if you got it at your place of work after performing a service for the patron, it's a tip.

Hart CO
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    “something for nothing" we even had the discussion here of whether a 'gift' to bloggers was taxable. If you liked my work, you gained value, knowledge or entertainment, and a gift to me is taxable. – JTP - Apologise to Monica Apr 24 '17 at 22:14
  • Assuming your last sentence is correct, then what about places that give out gift cards (or whatever) for being a hard working employee? Do those have to be reported? – Michael Apr 24 '17 at 22:16
  • Depends on the value, apparently, same article says: Gifts worth more than $75 are taxable. Gifts awarded for length of service or safety achievement are not taxable, so long as they are not cash, gift certificates or points redeemable for merchandise. The tax-free value is, however, limited to $1,600 for all awards to one employee in a year. – Hart CO Apr 24 '17 at 22:18
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    The difference between that scenario is that if the gift-giver is not your employer, then the amount doesn't matter, it's all tip. – Hart CO Apr 24 '17 at 22:29
  • @MichaelC I'm in canada, so obviously different, but at my work we often get raffles and stuff... if you win ANYTHING in a raffle, your pay that week is slightly reduced, because the thing you WON becomes a taxable benefit... – Patrice Apr 25 '17 at 18:48
  • @JoeTaxpayer A "gift" to an amateur blogger would probably be taxable hobby income. You could probably offset it with hobby losses, which aren't normally deductible. (Which is too bad. My hobby of acquiring expensive sports cars has posted significant losses.) My daughter used to raise bunnies as a hobby, and when she sold them, the income was effectively not taxable because of her expenses for food, cages, and so on. – David Schwartz Apr 25 '17 at 19:25
  • @MichaelC. Yes. Anything that is cash or cash equivalent must be reported as income, even if the company labeled it "gift". Hart CO made a good point in saying that it is not taxable for service or safety. But this is why, more than not, you hear of the golden watch as a gift from business to employees. – Liam Apr 25 '17 at 19:48
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    I think it's unlikely that bartenders report all the shots that are bought for them… – Neil G Apr 25 '17 at 20:17
  • I think this is especially true considering the comment that says "taxation is theft" - he's essentially confessing to conspiracy to commit tax fraud. – corsiKa Apr 26 '17 at 00:10
  • So even if the patron gives the server two amounts of money, one which is 20% of the amount of the bill and labelled "gratuity" and another which is not linked to the amount of the bill, the latter is still a "tip"? What if the customer comes in on a different date to give the gift without ordering anything? –  Apr 26 '17 at 00:55
  • It doesn't matter what you call it, so in the first scenario all still tip. If a customer came in the next day to give money to their server from a prior day, it still sounds like a tip, the timing doesn't seem relevant as in the example of a teacher getting gifts at Christmas. If you left a tip one night, and came in a week later with a gift, I don't think people would think it a tip. – Hart CO Apr 26 '17 at 02:44
  • No gift is "something for nothing" though. – Hatted Rooster Apr 26 '17 at 17:48
  • Getting pleasure from giving a gift doesn't mean the person receiving the gift gave you anything. – Hart CO Apr 26 '17 at 17:51
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Q: If I call a tail a leg, then how many legs does a dog have?
A: 4. You can call it whatever you want, it's still a tail.

The scenario is nonsense. There is a quid pro quo, the waitress served the customer and he tipped her. A $7 tip on a $24.47 check. He was generous, but misguided if he thought that this note would let the tip go untaxed.

And even though the article you link is fresh, the author has the gift threshold incorrect. This year it's $14,000, and has been so since 2013.

A cute story, and unlikely to be an issue for $7, but the IRS would take notice if this idea gained any traction.

Two references -

If Gifts Are Not Income, Why Tax Gratuities?

From the Tax Court Files: Is That Money a Gift or Income?

JTP - Apologise to Monica
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  • Do you have a source for the claim that a quid pro quo makes something a tip and not a gift? That seems reasonable to me, but I can't find any source for it. – David Schwartz Apr 25 '17 at 07:07
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I worked in the service industry for over 10 years and this came up every now and again. Mostly in hypothetical situations.

I'm not a tax expert, but my general understanding is that it is viewed as income by the IRS if you performed a service of any kind in exchange for the money. In other words, if you waited on the table, and they left you a gift for doing so, it is taxable.

You'll probably also find that if you pool tips with other employees or have to tip out the bartenders, cooks or dishwashers, they'll generally agree with the IRS that you clearly received a tip and want their fair share.

While the concept of "gifting" money to others in a situation like this is intriguing, especially in the service industry, it really doesn't meet the definition of a gift in the eyes of the IRS. For it to truly be a gift, the person would have had to intend to gift you the money even if they hadn't come into your restaurant at all that night. That clearly is not the case here.

Keith
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    I think the guest's intent is to say that this is not meant to go into the shared tip pool. – Simon Richter Apr 25 '17 at 01:55
  • Which is nice, but irrelevant if the employer's policy is to pool all tips. – Nij Apr 25 '17 at 06:00
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    This particular case is an amount of money that is normally sized for tip and accompanied by a "taxation is theft" note that suggests a clear intent to tax avoidance of something that would be normally taxed. But what about, say, a customer who gives their waiter $200 after hearing about a difficult personal situation they are in? In that case the amount is not connected to the service, and they would not have tipped some other waiter that amount, so would this still apply? – Random832 Apr 25 '17 at 16:10
  • @Random832 I think that could certainly be considered a gift, especially if the gift giver left a normal tip at the table. Then you would have a legal argument IMHO because you could say the tip was for the service, the gift was unrelated. – Keith Apr 25 '17 at 16:13
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Here's my obligatory contrarian answer...

No, the way the note was written, it wouldn't stand up to IRS scrutiny. Libertarians need to get a little more creative if they want to skirt the laws and make up a credible story about why it is a gift:

Thanks for chatting with me at dinner tonight, I feel like we're becoming fast friends. I'm sorry you weren't able to sit down and eat with me, so here are a few bucks to buy you dinner/dessert when your shift ends. It's not a tip; your service was lousy!

I'm still doubtful that this would stand up to scrutiny, but unlike the note that was left in the picture, it actually does have a chance.

NL - Apologize to Monica
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  • The question is, what would the IRS be scrutinizing? What is the test for whether something is a tip or a gift? – David Schwartz Apr 25 '17 at 18:07
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    @DavidSchwartz The test is whether there was a service performed in which the money is compensating. Quid pro quo. My hypothetical note specifically asserts that there was not. – NL - Apologize to Monica Apr 25 '17 at 18:46
  • But you concede that the thing the note asserts is false, right? You understand that the payment was in fact part of the server's wage paid by the customer in response to custom and social pressure. You don't dispute that, do you? If it stands up to scrutiny, that just means you got away with tax evasion. Right? Because I read the question as "is this tax evasion", not "how can I get away with tax evasion". What makes your answer contrarian? Do you think others think it's not possible to get away with tax evasion? – David Schwartz Apr 25 '17 at 19:16
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    @DavidSchwartz Funny, what's the test to tell the difference between tax evasion and tax avoidance? – NL - Apologize to Monica Apr 25 '17 at 20:31
  • Technically, tax avoidance is when you change the economic reality of a transaction in such a way that it legally reduces your taxes but wouldn't be a sensible change otherwise. Tax evasion is when you report or pay less tax than the law requires, which is (at least notionally) less than what is equitable given the economic reality of the transaction. But in practice, it can result in some fairly fine hair splitting. – David Schwartz Apr 25 '17 at 21:08
  • @DavidSchwartz I would probably distill it to a much simpler test. Tax evasion is out of compliance with the written tax code, whereas tax avoidance is in compliance. So given that tipping allows--a subjective judgment of the server's level of service that can justify--zero tip, would an explicit declaration of that judgment (the service was subpar) be in compliance with the IRS code or not? – NL - Apologize to Monica Apr 25 '17 at 22:25
  • No. If the waiter or waitress relied on a declaration that they were all but certain was false, that would be simple fraud. It is obvious to the waiter/waitress that this was a false declaration made solely in the attempt to avoid taxes. – David Schwartz Apr 25 '17 at 22:43
  • Let us continue this discussion in chat. – NL - Apologize to Monica Apr 25 '17 at 22:43
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Imagine two restaurants. One has prices 15% higher than the other, and the owner pays this 15% to his wait staff in the form of higher wages. The other has lower prices, but the average customer gifts 15% to their waiter.

Clearly, in the first restaurant, the 15% the wait staff receives is taxable income. It is traditional salary. What legitimate, economic justification is their for treating the second restaurant any differently?

Imagine a grocery store in a small town that offered long-time customers a "pay nothing" option but made it clear that they'd be subject to social ostracism and no longer welcome in the store if they didn't gift 85% of the usual cost of the items. The customers would save on sales tax and the grocer would argue that all that money was gifts, not income.

Of course this doesn't work. The IRS, and the laws, don't care very much about what you call things. They care about the underlying economic reality. If the money was part of the payment for the services rendered, regardless of how it was delivered, what the parties called it, or whether the obligation to pay was legal or social, it's still a payment for the service and it's still taxable.

You would have to be able to argue to the IRS that it really was a gift and wasn't any form of payment for the service received. Otherwise, it's just a scheme to evade taxes.

David Schwartz
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  • I don't mean to put words in your mouth, but you seem to be citing the Duck Correlation - "If it looks like a duck and quacks like a duck.... " I agree with you 100%, even if the IRS web site makes no mention of ducks. – JTP - Apologise to Monica Apr 25 '17 at 19:04
  • There's two separate issues here. One is why tips are taxed when gifts aren't. And the second is, given that rationale, can we defend the claim that this is a gift and not a tip. The duck test covers the second question -- the only argument that this isn't a tip is that the customer said it wasn't. Taxes are based on underlying economic realities, not how transactions are characterized. But I think it's equally important to understand why this is taxed and why it would be inequitable not to tax it. That avoids an answer that's essentially just "that's the way it is". – David Schwartz Apr 25 '17 at 19:13
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    @DavidSchwartz, you raise some interesting points. It seems to me that tips are taxed because they are income, but gifts are not taxed because it is in society's best interest to allow people to give unearned money to others without penalty. –  Apr 25 '17 at 22:18
  • For example, when I was young my parents did not always have a lot of money and sometimes struggled to put food on the table. My father's employer wanted to help us, so a few different times gave us money for food (I believe in the form of gift cards, but he would also meet mom&dad at the grocery store and pay for groceries directly). Note that even though this was his employer, this was not income, because it was not earned. –  Apr 25 '17 at 22:20
  • "What legitimate, economic justification is their for treating the second restaurant any differently?" Because you don't have to pay that gift, even if the average customer does. That makes a difference in my eyes. I'm not even sure I agree with tips being taxed. – NoDataDumpNoContribution Apr 26 '17 at 11:46
  • @Trilarion That would allow every business to completely avoid taxes by making all payments optional. For example, you could have a contract that specified that a payment must be made by August 6. Any payment on August 5 would be entirely optional. – David Schwartz Apr 26 '17 at 18:26
  • @Trilarion Worse, when you tax advantage a custom, it becomes more prevalent. Do you like getting your health insurance from your employer, so your choices are up to your employer and if you lose your job you lose your health insurance? We have that crazy thing because it's tax advantaged. Most people think our tipping system for wait staff in America sucks. If you want to tax advantage it, it will likely become even more entrenched, companies that discourage it will be disadvantaged, and it may even spread to other services. – David Schwartz Apr 26 '17 at 19:50
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One way to possibly disambiguate it from a tip is to receive it outside of your service context. If there really is a relationship, and they want to show appreciation or help you out financially, the "gift" could be given outside of the restaurant.

Otherwise, I agree that it seems like tax evasion. The purpose of the money was to compensate for services rendered, which is income, not a gift. If it's just a random stranger, then I'd have a hard time arguing that the purpose was pure altruism versus socially-mandated tipping.

Why can't I just have my employer just give me a "gift" every Christmas instead of a bonus? Or just reduce by salary by $18k and give me a $1,500 "gift" every month?

D Stanley
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  • The only difference is that it's not the employer gifting the money. It's a third party. – Michael Apr 25 '17 at 15:59
  • @MichaelC. I understand that - my point was to illustrate that just calling something a "gift" does not make it so (which is what the other answers contend as well). – D Stanley Apr 25 '17 at 16:01