If you are working at a restaurant, you likely know that there seem to be grey areas when it comes to wages, tips, and taxes. Although bartenders and servers can walk away from a hectic night of work with a couple hundred in their pocket, there is a great deal of uncertainty about future taxes that will have to be paid on that money. Understandably, many restaurant workers approach the tax deadline with apprehension; they don’t know how much they’re going to owe in taxes. To help clear up some of this anxiety, we will discuss what restaurant employees need to know about their taxes.
As you likely know, many bartenders and servers rely heavily upon their tips earned, most of which end up being cash. Atop these tips, hourly checks are taxed. The total tax figure depends heavily upon the tips claimed by the employer, however. Because of this, your hourly rate may not be significant enough to cover the required taxes, especially for employees in places like Virginia where the rate is painfully low.
Tax Form 1040 A
Many restaurant employees qualify for Tax Form 1040 A: a simpler version of the standard 1040 income tax form that you are required to file with IRS annually. This form contains many of the standard deductions and tax credits but boasts increased flexibility on reporting income. You may qualify for this form if:
- Your income is less than $100,000.
- You did not itemize your deductions.
- Income derives solely from wages, tips, salaries, interest and dividends, taxable scholarships, capital gains distributions, pensions, IRAs, unemployment, annuities, or taxable social security.
- Only claims adjustments to income pertaining to tuition/fees tax deduction, student loan interest tax deduction, IRA deduction.
- You do not claim a child tax credit, an earned income tax credit, or an education tax credit.
Despite which form you choose to send, not filing or paying taxes can have dire consequences, so do not wait to handle this duty.
Filing your 1040A
To File a 1040A you must have:
- A copy of your previous tax return
- A valid ID or Passport
- Bank account number
- Birthdate for you, your spouse, and dependents
- Filing status and residency status
- Proof of any tax credits, exclusions, or deductions
- Routing number
- Social Security Numbers for you, your spouse, and dependents
- Statements of interest/dividends from banks, brokerages, etc.
- Statements of wages earned like the W-2, W-2G, 1099-R
What Can I Write Off?
Restaurant employees can write off several things in order to cut down their tax figures. These include:
It is essential you track and record the amount that you tip out nightly to service bartenders, bar backs, busboys, hostesses, and other such recipients. If this figure is not recorded by your employer, you might end up paying more taxes than necessary. Ask your employer whether they are claiming your income pre or post tip out.
If you are required to buy your outfit and shoes—without reimbursement—to meet the restaurant’s employee dress code, you can write these expenses off. Save and catalog receipts so that you have evidence if needed.
If you need a certificate to perform a specific service within the restaurant or to tend bar, these classes and expenses can be written off as long as you have the receipts.
Figuring Out Your Paycheck
If you want to prepare for next year’s tax season, study your paycheck and identify which tax bracket you fall under. To do this, locate the “Net Pay” figure and extrapolate on that for the rest of the year. After that, research tax rates for your state (as opposed to federal, state taxes vary). These numbers will help you guestimate what percentage of your income the IRS will be entitled to.
Budgeting for Taxes
If you want to ensure that your tax debts do not cripple your savings, it would be wise to put away 10%-20% of your net pay and store that up for when the tax man comes knocking. By making this a habit and portioning off a section of money, you create inherent financial relief; it will feel like far less of a blow, even if you owe more than you squirreled away.
When it comes to restaurant employees, figuring out taxes paid and owed can be quite the mire to wade through. By preparing ahead of time, you ease this process and protect yourself from a crippling tax obligation. To further help clear things up, considering filing a 1040A Form.