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Comment by eptcyka | Hacker News Reader

Hey, tips are tax-free. I think this is mostly the reason why businesses encourage tipping. I think it's a collective failure of the electorate and the government that you end up in such a situation.

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Tips are not tax-free in the US nor the UK — you are supposed to declare them and pay the tax yourself.

Sure, individuals often don’t pay tax on their tips, but blaming that on the government seems harsh.

I believe there are employer side taxes in both the US and UK, right? Even if tips would be reported and taxed as income buy the worker, they would still be cheaper because the customer paid no tax.

Sure, as per the tax guidelines, tips are not tax free. I'm well aware of this. But business owners that may ask their customers for tips most definitely see this as a way to bargain with would-be employees that their miserably low wage will not be that bad as it's just a supplement to the mad stacks you will be making from tips. And they are not on the hook to pay this tax, the employees are. And if the tip is paid in cash, at least here in the UK, it's very hard for the tax authorities to actually determine that you are not paying the tax you should be paying. The materiality for anyone above the income tax threshold is way above what a normal tip would be and nobody's going to do multiple sting operations to test if a waiter is actually not paying tax.

Where do you get this idea? In the US there is a line on the income tax form that explicitly asks for how much you earned in tips, and that is explicitly counted into your wages for income tax purposes.

How much tipping these days is cash vs card? I would imagine that cash tips are underreported on tax forms.

Credit tips are cashed out at the end of the day, generally speaking, so that the "credit tips" are offset by unreported "food cash payment" that sits in your pocket all night. (I believe it also relies on the business underreporting sales, but... Cash. Also likely hiring the wait staff under the table)

Tips are effectively tax free as reporting rates are abysmal.

How would this realistically be enforced though without there being a paper trail at all?

Kudos to those honorable people that do declare tips on their tax return though.

There's a default rate (percentage) that gets used in the event of an audit, I believe.

If you are somewhere that tracks your individual sales, you'll get hit with this.

To be fair, the rate is pretty low and so almost everyone will still have a large percentage of their tips go untaxed.

My stae also has a line on my taxes for me to declare and pay sales tax on anything I bought out of state that year. How many people do you think accurately fill that line out?

Tips are counted as pay, buddy. Legally if hourly rate + tips falls under minimum wage, the employer has to cover the difference. Either way, tips are income and thus taxed as such. No idea why you could ever expect that it's tax free.

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