Over the past few months I have been pondering why we (by we, I mean Americans) are willfully participating in tax evasion by a whole segment of our economy. It has been on my mind since we have been pounded on with the idea that the "rich" are not paying their fair share. It got me wondering if the "rich" are not paying their fair share, then who else isn't paying theirs either. I think you will be surprised that I am NOT taking about the illegal aliens getting paid in cash for their labor. I am talking about the concept of tipping the wait staff at your favorite restaurants. Don't get me wrong - I tip generously due to Kristy's experience as a waitress. I am also not saying that the people bringing me my food and drinks don't earn their money. I am just curious why we let a significant amount of their earnings go without paying the taxes that every other (legal) worker pays.
According to the U.S. Department of Labor, federal regulations require wait staff, servers, and bartenders to receive at least $2.13 per hour. If the tips received don't meet the minimum wage for other employers, then the employer must make up the difference. The restaurant owner relies on two things to report the actual earnings of the wait staff: (1) credit card receipts and (2) wait staff honesty for cash patrons. I am going to present an argument that a waiter could fairly easily dodge taxes on about $10,000 of income each year while at the same time reducing the taxes owed by the restaurant owner (by the wait staff's income being unreported). I am going to walk through this scenario even though I have never been a member of the wait staff. If I am wildly wrong on some of assumptions, please point them out so that I can learn something.
Here are the assumptions that I am using for a typical family or date style restaurant (e.g., Chili's, Appleby's, Outback, Olive Garden, etc.):
- 5 Hours/Shift
- 4 Shifts/Week
- 50 Weeks/Year
- 10 Tables/Hour [I realize this is probably HIGH]
- $40 Total Bill/Table [I realize this is probably LOW]
- 25% of Tables will pay the tip in cash
Now, let's look at the tax consequences of the lower value ($5,000) for the unreported income. For the waitress, this represents an avoidance of about $1,100 in taxes. How is that possible? Assume a 15% federal income tax rate, 6.2% Social Security tax, and 1.45% Medicare tax. Now, multiply those taxes by the $5,000, you get $1132.50 (this doesn't include state or local income tax avoidance). The restaurant owner would be required to pay 7.65% (6.2% Social Security + 1.45% Medicare) of that $5,000 which is $382.50 [this doesn't include state or federal unemployment insurance taxes]. This is a total of about $1,500 in taxes that we have allowed to slip through the cracks or have simply ignored.
I want to be clear. I think you should pay the minimum amount of taxes that you are LEGALLY supposed to pay. I have no issue with using tax deductions, tax credits, and tax-free investments to reduce the amount of taxes that you pay. You would be an idiot to pay more if you don't have to do so. However, I am completely opposed to ILLEGALLY hiding income for the purposes of not paying taxes on it.
I have also been thinking about how I would change the restaurant business to fix this. Here is are the items that I would change if I ever ran a restaurant:
- Wait staff would be paid an hourly wage commensurate with their work.
- Training rates and fully trained staff rates would be different.
- Good wait staff would make more than the average rate.
- Poor wait staff would make less than the average rate or be let go.
- No tips!
- Acceptance of a tip would be grounds for dismissal.
- Price on the menu would be all inclusive (that is, tip and sales tax would be included). A $9.95 burger on today's menu would cost $13.50. Here's how that breaks down:
- $10 to cover food costs, overhead, and back of house wages.
- $2.25 to cover the additional cost of including waiter tips and additional payroll taxes in the bill.
- $1.25 to cover sales tax.
- We already pay this, but it is hidden by including taxes and tip when the bill comes.
- Menu and signage would include a statement like, "Please do not tip the wait staff. They are paid appropriately to serve you with a good attitude and respect."
- This would make me, as the owner, responsible for the wait staff doing its job - not my customers.
- This also takes away the necessity of the patron to evaluate whether or not it should be a 15%, 18%, or 25% tip. They could simply enjoy the service and meal KNOWING what the cost was before the check arrived.