Tips are a mainstay in the service industry. According to the Nevada Department of Employment, Training and Rehabilitation, the service industry employs more individuals than any other employment category. And GOP Presidential candidate, Ron Paul, wants their vote. Paul has introduced the “Tax Free Tips Act” to exempt tips from federal and payroll taxes. A bigger question is whether any state now taxing tips, like Nevada, would follow suit.
Under the Internal Revenue Code, gross income includes “all income from whatever source derived, including … compensation for services, including fees, commissions, fringe benefits, and similar items.” Internal Revenue Code §61(a)(1). Under IRC Sections 101-140, gross income does not include such items as certain gifts, Supplemental Security income, certain health care plan contributions, death benefits, and other sources of income. Tips paid to a service industry employee are not an excludable income source; therefore they are deemed taxable gross income and subject to withholding tax.
Currently, under the Fair Labor Standards Act (FLSA) service industry employers in Las Vegas are required to deduct any applicable taxes for any service industry employee who receives $30 in tips per month. In the reverse, Las Vegas’ service industry employees who receive tips are required to maintain documentation to verify how much they have earned in monthly tips, and then submit this information to their employers by the 10th of the following month. When employees do not maintain sufficient documentation to calculate their tip income, the IRS will generally assume a service industry employee’s earned tip income at 8 percent of the server’s food and beverage sales.
Under current FLSA and Nevada statutes, employers with tipped workers (such as wait staff, bartenders, and valets) may deduct up to $6.12 an hour as a tip credit from the minimum hourly wage paid to an employee. To qualify for the credit, an employee must earn more than $30 a month in tips. And if the total amount of an employee’s hourly tips and cash wages does not equal the minimum hourly wage, a Nevada employer must compensate the employee for the difference.
For instance if during the first hour of work an employee receives $3.00 in tips and their minimum wage is $8.25, their employer must pay the employee an additional cash wage of $3.12 ($8.25 – $3.00 – $2.13). If the employee’s minimum wage is $7.25, their employer must pay the employee an additional cash wage of $2.12 ($7.25 – $3.00 – $2.13). If the same employee earns $15.00 in tips during their second hour of work, their employer need only pay the employee the minimum wage of $2.13.
The commentary is for educational and commentary purposes only. If you or someone you know are a service industry employer or employee with an FLSA or other employment matter, and would like to be represented by a Nevada attorney, contact our office for a free confidential case review and receive a response within hours. Call Toll Free 866-414-0400.