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Why Giving A $10,000 Tip Is A Bad Idea

By , July 13th, 2007 | 8 Comments »

waitressThere is a story making it’s way around about a waitress that received a $10,000 tip and what a wonderful gesture it was. No doubt about it, except that because of the way it was given, the waitress is going to have to pay taxes to the IRS for it.

Granted, if the person giving the money had done so as a gift where no taxes would need to be taken out, it would not have generated the publicity it has, but by making the decision to give the money as a tip rather than as a gift and assuming a 15% tax rate, the decision will cost the waitress $1500 that instead goes to the government. For a student strggling to pay for school, that’s a lot of money that could have helped.

I don’t want to take anything away from the generosity that the family that gave the tip showed. It was a fantastic gesture that should praised, but it shows that if you want to do something good, it’s worthwhile to think through the financial consequences of the way you do it or else a large chunk of money will needlessly end up going to the government instead of the person you intended to benefit from it…

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  • disneysteve says:

    Another factor is to consider issues on the giver’s end. Rather than giving cash or a check, the giver could give appreciated assets, like stocks or mutual fund shares. By gifting those, the giver would avoid the capital gains taxes he/she would have to pay if he/she sold the shares.

  • dan says:

    This is really unfortunate since it is clear that the person who gave the money wanted it to be a gift. The news coverage explaining it was a tip will mean that even though it was meant as a gift, the IRS will make sure to take their cut.

  • Anon says:

    Why are you so sure this would be taxed as income? Two reasons to think it need not be:
    1) the waitress could argue this wasn’t payment for a service (after all, she clearly didn’t provide $10,000 worth of restaurant service) and that this instead meets the IRS standard for a gift (that the giver gave it in a detached and disinterested manner)

    2) I thought some waitstaff has the option to report tip income as some fixed amount, determined by the IRS, in order to avoid having to keep precise track. Am I wrong about this?

  • Michael says:

    Your tip income appears as a standard amount on your W2, regardless of how much you actually get. I usually received far more that what appeared. The tip income basically has to at least bring your wage up the minimum wage.

    At least that’s how it worked when I waited tables.

  • Teri says:

    Actually I believe that you are s’posed to report your tip income as you actually receive it BUT there are other programs/options that sometimes allow you to report a set amount. I think just because you receive a set amount in your W-2 doesn’t mean it was done right. There is a huge issue with noncompliance of the tax law when it comes to tips – vastly underreported.

    However, I am with Anon. I think in her case she could argue it was a gift. However, if the IRS does come after her due to the publicity, she may have to hire a CPA or a lawyer to argue on her behalf that it was really a gift (which will cost a lot of money anyway). I would imagine it will probably be a non-issue. But it could be one all the same. I think though it was called a “tip” it is obviously a “gift” and I don’t think she will face much trouble.

    Still a good point as the taxes on prizes and awards really trip people up. Large sums of money should never change hands without a little tax consideration. The golden rule in general is you don’t get something for nothing – so remember that when you min $1 million. πŸ˜‰

  • NewMillionaire says:

    Great article and point of view that most people would miss. Thanks for writing this. I hope that will be considered as a gift instead of a tip however, since this was thought way before it was given and it had more to do with liking and believing in the waitress and the fact that they wanted her to get an education rather than how good the service and the pizza was.
    Great gesture from the family! Our society needs many more news like this instead of the sad ones that overwhelm the media quite often

  • Mel says:

    The restaurants I’ve worked at automatically report to the IRS what tips you make off credit card payments, but not cash or check. Technically the restaurants have told the staff you are “required” to report all your tips, however it is an unspoken understating you will only claim what is already declared on the credit cards. This is why severs love when customers pay with cash. Restaurants (and all merchants for that matter) prefer cash as well to avoid the credit card fees.


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