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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®.
As a foodservice worker, your tax situation can be complex. But it doesn’t have to be.
Due to the nature of many foodservice jobs, your tax situation may be more complicated than the average person’s. This is especially true if you earn tips or your employer doesn’t reimburse you for some personal expenses you incur for your job.
To help make it easier to file your taxes and maximize your tax refund, if you’re owed one, we’ve put together a few tax tips for foodservice workers filing their federal income taxes.
- Understand how your tips get taxed
- Learn how to properly report your tip income
- Know what out-of-pocket expenses you can deduct
1. Understand how your tips get taxed
As an employee, you’re required to report both your wages and tips as income on your tax return. This includes tips you receive directly from customers and tips your employer passes on to you from credit card payments.
Your employer is required to withhold taxes on your tip income. If your tip income is relatively high, most of any salary your employer pays you could go toward taxes. And if your wages aren’t enough to cover the taxes you owe, you may need to provide extra cash to cover the gap. Or you may simply report it as additional tax owed on your tax return.
Of course, it’s not always as simple as receiving tips directly from the customers you serve.
“If tips are pooled, and management disburses them out, the employee is only responsible for the amount of tips they received,” says Christopher Jervis, president of accounting services firm Lone Wolf Financial Services.
For example, let’s say you receive $500 in tips from customers over the course of a week, but your employer has a tip-pooling arrangement. Your $500 goes into a pot and gets distributed along with the tips earned by your co-workers.
If you end up with $450 in tip income after all tips have been pooled and distributed, you only have to report $450 as income. But if you end up with $550, you’ll report that amount. In either case, you don’t report your initial $500.
2. Learn how to properly report your tip income
“The employee is responsible for reporting tips to the employer,” Jervis says. “And for keeping a tip diary that shows the tips earned for every shift worked.”
Each month, you’re required to report your tip income to your employer using IRS Form 4070, as long as you’ve earned at least $20 in tips that month.
Your monthly tip report is due by the 10th day of the month following the month in which you received the tips and includes the following information:
- Your name, address and Social Security number
- Your employer’s name and address
- The period you’re reporting
- The total tips you received
- Your signature
Your employer will then use this form to determine your tax withholdings and report your tip income to the IRS.
While you must report your tip income monthly, it’s also wise to keep a daily tip record to ensure accurate reporting. Your tip record will be especially useful if you’re in the situation of an IRS audit.
You can accomplish this by either writing your daily tips in a diary-type tool (on your phone or on paper) or by keeping copies of restaurant bills and credit/debit charge slips. You should always include your name, the business name, your employer’s name and the date you received the tips. Keep in mind that you also must report noncash tips like tickets, passes or goods received. You can always use IRS Form 4070A if that works better for you.
Since you don’t have to report monthly tip income of less than $20 to your employer, your record of how much you’ve received in tip income can conflict with the figure your employer reports on your W-2 form at the end of the year.
In this case, you’ll still need to claim your unreported tips as income on your tax return.
It’s also possible that your records show less tip income than your W-2 for another reason. Your employer may have assigned tips to you because it’s required to allocate tips to employees or because your reported tips were less than your share of 8 percent of food and drink sales for the period.
In this situation, no taxes are withheld for these allocated tips, but you do have to report them on your tax return.
3. Know what out-of-pocket expenses you can deduct
If you pay any of the following employment-related expenses out of pocket, and your employer doesn’t reimburse you, you may be able to deduct them on your tax return.
- Work uniforms if they’re required as a condition of employment and not suitable for everyday use. For example, an employer requiring you to wear a white shirt and black pants probably wouldn’t qualify for the work uniform deduction because the clothing is suitable for everyday use. However, if you happen to work at a Medieval-themed bar and your employer requires you to buy a costume to fit the decorations, then you can probably deduct the cost of the uniform.
- Classes and certifications, such as alcohol awareness training or specialty licenses
- Tools and supplies you use for work
- Transportation, meals, entertainment and local lodging related to your work
Let’s say you’re a pizza delivery driver, or your employer requires you to drive for other reasons related to the business. You can deduct some of your costs of driving for business purposes using a standard mileage rate of $0.535 per mile. You can do this even if your employer pays for your gas.
There’s something to keep in mind with all these deductions, however. To claim them on your tax return, you must do two things.
- Itemize your deductions instead of using the standard deduction
- Report only the unreimbursed employee expenses to the extent that they exceed 2 percent of your adjusted gross income
For example, if you had $1,000 of unreimbursed employee expenses in 2017 and your adjusted gross income is $30,000, you can only claim $400 of the expenses as a deduction.
If you’re an employee in the foodservice industry, your taxes might get a little more complicated than the average taxpayer’s. By using these tax tips for foodservice workers, you can get ahead of the game and make the tax filing process less stressful.
To help you get it right at tax time, Credit Karma Tax® can take you through a step-by-step process to properly report your income and eligible expense deductions. And, as you learn more about how the process works and where you can take advantage of tax breaks, you’ll be better able to maximize your potential for a tax refund every year.
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.