Automatic Tips To Be Treated As Taxable Wages

"Gratuity Included" Going Extinct?
“Gratuity Included” Going Extinct?

We’ve all been out to a restaurant and received a bill where gratuity–usually around 18%–was included in the bill.  This routinely occurs when larger groups dine together.  However, this practice may be going extinct as a change in the tax rules starting January 1st, 2014 will view automatic gratuities as a “service charge”, which opens them up to be taxed as wages.

Any way you look at it, this is not good news for employers, and especially employees that depend on tips for their lively hood.  Employers would be subject to more paperwork and more responsibility to accurately report their employee’s wages to taxing authorities; potentially opening them up to payroll audits if they continue the practice of automatic gratuities, but are not vigilant reporting these “tips” as wages.  Or they simply can eliminate  automatic tips all together, and have all dining parties (regardless of size) tip their servers the traditional way.  The later appears to be the choice that many large restaurant chains are making:

 [Olive Garden, LongHorn Steakhouse and Red Lobsters] stopped automatic tips at 100 restaurants in four cities, where it is testing a new system in which the restaurants include three suggested tip amounts, calculating for the customer the total with a 15%, 18% or 20% tip on all bills, regardless of party size. Diners can opt to tip more or less than the suggested amounts, or to not tip. Depending on how patrons react and how well the new software system works, Darden [Restuarant Inc. which owns all three restaurant chains] may switch to such suggested tips at all of its restaurants…”I think the vast majority of restaurant owners will discontinue the practice,” says Denise Wheeler, an employment attorney in Fort Myers, Fla., who represents several restaurant chains.

It’s a ‘Damed if you do, Damed if you don’t’ scenario for servers.  On the one hand, if their employer decides to keep automatic gratuities, their tips become wages and subject to withholding thereby guaranteeing they do not see their full 18% tip.  On the other hand, eliminate automatic gratuities and patrons might not tip as much as they would had the tip been included…not to mention the potential for arguments over tips between servers and patrons also increases:

Restaurants adopted automatic gratuities to help ensure that their servers—whose tips supplement a salary that is often less than the federal minimum wage of $7.25 an hour—weren’t stiffed on large tabs. But many servers are likely to support dropping the practice because they don’t like the idea of their tips being treated as wages, which requires upfront withholding of federal taxes, and means they won’t see that tip money until payday.

“I don’t want my tips to be on my paycheck as a wage. I like to get my tips at the end of my shift because I know what I’m getting right away,” says Tamie Cordoba, a 54-year-old server at a LongHorn Steakhouse in Jacksonville, Fla.

Ms. Cordoba makes base wages of $4.25 an hour, or $144.50 to $161.50 for her average workweek of 34 to 38 hours. She said she usually makes an additional $500 to $650 a week in tips. Since she never knows exactly how much she will get each week in tips, getting paid at the end of each shift helps her budget, Ms. Cordoba said. “In this industry, that’s what we live on. If I had to wait two weeks I don’t know how I’d survive.

This is another head scratcher from the IRS.  While this rule was proposed for 2013, the implementation of the rule was delayed to 2014.  The IRS issued a statement that “additional clarification” is recommended concerning this rule.  Right now the only thing clear is that hard working lower income taxpayers will again pay the price in the form of lower net income.  

We are approaching the 5 year anniversary of the global financial crisis, and the ensuing taxpayer bail-out of the banks that nearly brought down the entire global financial system. This tax rule stands in stark contrast to the countless loopholes that  millionaire and billionaire financial executives have access to; the very same executives that caused of contributed to the crisis with their reckless investing and ‘aggressive’ accounting practices.  Which again raises this question:  Why hasn’t the justice department punished even one of these culprits?

We’d like to hear your comments.  What are your thoughts on this tax rule change?

Source: Wall Street Journal

Tips For Taxpayers With Foreign Income

Foreign Income Is Taxable

The Internal Revenue Service is reminding U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2011, that they may have a U.S. tax liability and a filing requirement in 2012.

The IRS offers the following seven tips for taxpayers with foreign income:

1. Filing deadline: U.S. citizens and resident aliens residing overseas or those serving in the military outside the U.S. on the regular due date of their federal income tax return have until June 15 to file. To use this automatic two-month extension beyond the regular April 17 deadline, taxpayers must attach a statement to their return explaining which of the two situations above qualifies them for the extension.

2. World-wide income: Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.

3. Tax forms: In most cases, affected taxpayers need to fill out and attach Schedule B, Interest and Ordinary Dividends, to their tax return. Certain taxpayers may also have to fill out and attach to their tax return the new Form 8938, Statement of Foreign Financial Assets. Some taxpayers may have to file Form TD F 90-22.1 with the Treasury Department by June 30.

4. Foreign earned income exclusion: Many Americans who live and work abroad qualify for the foreign earned income exclusion. If you qualify for tax year 2011, this exclusion enables you to exempt up to $92,900 of wages and other foreign earned income from U.S. tax.

5. Credits and deductions: You may be able to take either a credit or a deduction for income taxes paid to a foreign country or a U.S. possession. This benefit is designed to lessen the tax burden that results when both the U.S. and another country tax income from that country.

6. Free File: Taxpayers abroad can now use IRS Free File. This means U.S. citizens and resident aliens living abroad with an adjusted gross income of $57,000 or less can use brand-name software to prepare their returns and then electronically file them for free.

7. Tax help: If you live outside the U.S., the IRS has full-time permanent staff in four U.S. embassies and consulates. A list is available on the IRS Website – in the Contact Your Local Office section, under International. These offices have tax forms and publications that can help you with filing issues and answer your questions about notices and bills

IRS publications, forms and more information on topics useful to individual international taxpayers can be found on the International Taxpayer page.  Contact an R&G Brenner professional today if you have any other questions pertaining to taxes on foreign income.


4 Tips: Unemployment Benefits

4 Tax Tips For Those Collecting Unemployment Income

Unemployment can be stressful enough without having to figure out the tax treatment of the unemployment benefits you receive. Unemployment compensation generally includes, among other forms, state unemployment compensation benefits, but the tax implications depend on the type of program paying the benefits. You must report unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.  

Here are four tips from the IRS about unemployment benefits:

  • You must include all unemployment compensation you receive in your total income for the year. You should receive a Form 1099-G, with the total unemployment compensation paid to you shown in box 1.
  • Other types of unemployment benefits include,  benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund, railroad unemployment compensation benefits, disability payments from a government program paid as a substitute for unemployment compensation, trade readjustment allowances under the Trade Act of 1974, unemployment assistance under the Disaster Relief and Emergency Assistance Act. For complete information on each of the benefits listed, see chapter 12 in IRS Publication 17, Your Federal Income Tax, or Publication 525, Taxable and Nontaxable Income.
  • You must report benefits paid to you as an unemployed member of a union from regular union dues. However, if you contribute to a special union fund and your payments to the fund are not deductible, you only need to include in your income the unemployment benefits that exceed the amount of your contributions.
  • You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Tax will be withheld at 10 percent of your payment. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year.

For more information on unemployment compensation contact an R&G Brenner professional today!


When Is Income Non-Taxable?


Although most income you receive is taxable and must be reported on your federal income tax return, there are some instances when income may not be taxable.

The IRS offers the following list of items that do not have to be included as taxable income:


  • Adoption expense reimbursements for qualifying expenses
  • Child support payments
  • Gifts, bequests and inheritances
  • Workers’ compensation benefits (some exceptions may apply; see Publication 525, Taxable and Nontaxable Income)
  • Meals and lodging for the convenience of your employer
  • Compensatory damages awarded for physical injury or physical sickness
  • Welfare benefits
  • Cash rebates from a dealer or manufacturer

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

  • Life insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are generally not taxable unless the policy was turned over to you for a price.
  • Scholarship or fellowship grant If you are a candidate for a degree, you can exclude from income amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify for the exclusion.
  • Non-cash income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

All other items—including income such as wages, salaries, tips and unemployment compensation — are fully taxable and must be included in your income unless it is specifically excluded by law.

These examples are not all-inclusive. For more information on what constitutes taxable income, contact an R&G Brenner professional today.

Source: NJ Today

Airline Miles Taxable?

Citibank's Clients

Citibank recently sent out 1099 forms to thousands of it’s clients indicating that their redeemed airline miles are taxable to the tune of 2.5 cents per mile and listed as miscellaneous income.  This of course caused an immediate uproar not only because Airline miles could cost additional money in taxes, but also because if they’re not reported on your income tax return, the chances that the taxpayer will get hit by an Audit increases (not to mention additional penalties and interest).

Confused taxpayers and tax experts alike began flooding the IRS with calls asking for a ruling on whether miles can be considered taxable. The IRS addressed the issue, however, it appears their ruling only added another dimension of confusion to the issue:

“When frequent-flier miles are provided as a premium for opening a financial account, it can be a taxable situation subject to reporting under current law,” said Michelle Eldridge, an IRS spokeswoman.

OK, so Citi apparently has that part right. But what about miles received for using a credit card or handed out by an airline just for taking a trip?

Eldridge said that in those cases, miles wouldn’t be taxable because they’re more like a rebate.

“A common analogy,” she said, “is buying a $500 television at a retail store and receiving a $50 manufacturer’s rebate. It’s not income, just a deemed reduction of the cost of the television.”

What about valuing the miles? In Citi’s case, the bank is declaring that miles received by customers are worth about 2.5 cents apiece. But tax pros say Citi almost certainly acquired them for less, probably closer to 1 cent each.

“Under the income tax law,” Eldridge replied, “the amount of income to the taxpayer is the value of the property received, not the cost that the business paid to acquire the property.”

Therefore, it doesn’t matter how much the miles were worth to Citi when the bank deducted them as a business expense. The value that must be reported by taxpayers is whatever Citi says it is.

So if Citi is correct about miles being a prize or award for tax purposes, doesn’t that mean virtually all goodies handed out by companies are similarly taxable?

“Whether or not any incentive provided by a business must be reported to the recipient of a Form 1099 depends on the nature, value and other facts and circumstances surrounding the particular incentive,” Eldridge answered.

That’s a fancy way of saying the IRS doesn’t know.

Tom Griffith, a USC law professor who specializes in taxes, said that if frequent-flier miles can be considered income as a prize or award, “in theory, any benefit you get could be taxable.”

But he said the IRS would probably shy away from such thinking because of the administrative headache that would ensue if the agency had to make a call on every single little incentive given out by companies.

“As a practical matter,” Griffith said, “you can see why the IRS wouldn’t want to go there.”

This much is clear: Whomever thought of this over at Citi is probably going to get a huge bonus as Citibank stands to offset millions of dollars in expenses and place them squarely on the shoulders of their clients.  This is not exactly a great way to solidify customer relations and I can see this costing Citi some business.  However, the bigger question is how long will it take other banks to follow suit?  The deadline to issue W2s & 1099s is today–January 31st–so it appears that other banks will have to wait until next year.  Or, will there be such an outcry like there was late last year when Bank Of America tried to impose a $5 surcharge for debit card purchases?  Time will tell, but this doesn’t feel right…but when was the last time a bank too-big-to-fail-bank has done anything for the benefit of their customers?

Source: LA Times