What Part of Sales Do Waitresses Have to Pay Taxes on?
If you work as a waitress in a restaurant, you must pay income tax on all money you earn, regardless of how you earn it. However, determining how much you must report to the IRS increases in complexity if your compensation includes sales commissions, such as a percentage of the total checks for tables you serve.
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Commission on Sales
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Working as a waitress in a restaurant can be fairly lucrative if your employer provides you a commission on food sales rather than an hourly salary. However, it also means that the amount of income you earn each week could fluctuate. Nonetheless, the IRS requires you to report all commission earnings. For example, if your employer gives you a 10-percent commission on all checks and your total sales for one day is $1,000, you report $100 as your taxable income for the day. Regardless of whether you are an employee or independent contractor, your employer must report your annual commission earnings on a W-2 or 1099 form before you prepare your tax return.
Keeping Tip Diaries
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The reality for most waitresses is that your annual taxable income will include more than just the commissions you earn at the restaurant because of the tips you receive. The IRS requires all waitresses to keep records of the tips they earn each day and report the monthly total to their employer. Although it's not necessary to use any specific form to maintain a diary, the IRS provides Form 4070 for convenience. The reason for the tip reporting is so your employer can withhold sufficient Social Security, Medicare and federal income tax from your paychecks. You must make sufficient periodic payments of these taxes based on all earnings, including tips. And even though your tips may not come directly from the restaurant, your employer must withhold more of your commissions to account for the extra tip income you receive.
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Reducing Commission Withholding
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It is customary in the restaurant business for waitresses to share portions of their tips and even food commissions with other employees, such as busboys and bartenders. If you allocate a portion of your tips to these individuals, you can reflect each payment in the tip diary you submit to your employer each month. As a result, your employer will withhold less of your income for taxes since those amounts are not taxable income to you. And if your employer allows you to split commissions with other restaurant staff, you should insure that your W-2 or 1099 reflects the reduced commission.
Insufficient Withholding
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When your tips constitute a majority of your monthly income, it's possible that the commissions you earn are insufficient to cover the minimum tax withholding payment you need to make. In this case, it's important that you voluntarily make additional estimated tax payments to the IRS throughout the year. If at the end of the year your withholding is insufficient, you will be subject to estimated tax penalties even if you file your tax return and pay the rest of your tax by the deadline.
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