I recently started working at a local coffee shop. We get tips on top of our wages, and after every shift, we split up the tips and write down how much we earned for payroll and tax purposes. I was told by coworkers and the manager to ignore the cents if it’s less than a dollar. So, for example, if we made $78.36 in tips, we only write down $78 for the day.
It may seem like a small thing, but it adds up, especially since the business has almost 100 employees working thousands of hours each week. I’m wondering if this is something that happens often or if it could get the business in trouble with the IRS.
Technically, rounding is fine for simplicity’s sake. It’s common to round to the nearest dollar on tax forms. But honestly, I don’t think it’s a big deal. If you round down by 50 cents each time, it’s a tiny percentage of what’s reported. In fact, a lot of places don’t report cash tips at all. I can’t imagine anyone will care about this.
Kaius said:
Not a lawyer, but there’s a rule about not worrying over small stuff if it doesn’t make a big difference. It sounds like that’s what’s happening here.
Yeah, I was thinking the same. Just wanted to make sure. I guess it adds up over time. I estimated that all employees together might be underreporting $150 a week in total cents, which is $7800 a year. It’s a lot, but when you consider how much the business makes, it’s probably a tiny fraction of it. I always thought the IRS would care about even the smallest amounts.
This might not be the main issue, but just a heads-up: if tips are pooled, people with hiring/fire powers can’t take a share. That’s illegal under federal law.
Rounding to the nearest dollar is okay. Some days it might round up, some days it rounds down, but it should balance out over time. However, if you always round down – like from $78.97 to $78 – that’s wrong.
In the bigger picture, does it matter? Maybe not. But the business is paying less in taxes, and you might be shortchanging your social security. Just something to think about.
@Teegan
OP mentioned almost 100 employees. If they all round down $1, that’s $100 a day or about $36,500 a year. Even for a business that size, it’s not a big deal tax-wise.
@Teegan
Can you explain more about how this affects my social security? I’m not very familiar with this. I just know some of my income goes to social security for retirees and people with disabilities.
@Valen
Your social security benefits are based on your taxable income. People who don’t report all their tips may get paid now, but their benefits will be lower when they retire. It’s the FICA payroll taxes that fund social security and Medicare.
You can check your income record on ssa.gov and make corrections within a few years.
You’re good . Don’t stress about it. I’ve seen bartenders pocket $250+ in cash tips a night and only report credit card tips. No one’s worried about it. Imagine if the IRS started sending undercover agents to bust people for not reporting cash tips. That’d be wild!
Income is reported individually, so technically, each person is responsible for reporting tips. At the most, this could add up to $362 a year (99 cents x 366 days), but it’s probably closer to $100 a year. The IRS isn’t going to make a big deal out of missing $20 in taxes.
