Recently I have had a couple of cases where an employee who was receiving tips was injured. I think it is the custom and practice of the industry to not claim tips in an effort to increase take home pay. Obviously, there are consequences for this from a tax perspective, but from a Workers’ Compensation case perspective, the consequences can be just as bad financially.
So what happens when you do not claim your tips? First, you are avoiding paying taxes in the short-term, but your likely overall tax exposure is probably relatively low. I am not a tax attorney and cannot advise exactly how much exposure you would have, but there would be some exposure associated with not claiming all of your tips.
More importantly, from a Workers’ Compensation perspective, having tips claimed increases your average weekly wage. If you are injured and are missing time from work, the calculation for how much you were making per week is based on what you are actually claiming. If you are claiming the minimum and had been making substantially more, you would only received what you claimed. Recently I had a client who was a waitress and had been claiming $350 of wages per week. Her actual income was closer to $500 per week. By not claiming that $150 per week, her compensation rate for the time that she was out of work was reduced by $100. When she returned to work, her reduced earnings claim was greatly diminished. And when it comes time for permanency, even at a moderate rate, she will end up losing between $3,000 and $25,000.
What advantage did she gain by not claiming the tips? While she was employed, she had additional cash available for bills. More than likely though, at the end of the year, she would have likely received an earned income tax credit for the majority of her claimed wages and tips. I would advise tipped employees to consult with a tax professional to determine exactly what their total exposure would be for claiming all tips. There was also an informative article about the industry tax exposure posted by Siobhann Kathleen Williams, CPA on the following website: http://www.restaurantowner.com/public/342.cfm.
The consequences for not claiming the tips however were much more dire and ended up reducing her payments making it very difficult to pay bills while out on workers compensation. Workers’ Compensation is insurance against getting injured on the job. The basis for recovery is not only how badly you are injured, but how much you were making at the time you were injured. By not claiming all of your income, you reduce how much you will receive when you are injured and increase your financial burden when a catastrophic event occurs. When it comes time to make a claim for workers compensation, more often than not, you will wish that you had made the claim for tips and not the minimum as your coworkers will likely suggest. Why would you reduce coverage for one of the most important insurance policies you have available?
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