IRS Can Tax Estimated Tips, Says Supreme Court

by Mike Godfrey, Tax-News.com, New York

26 June 2002

The US Supreme Court has ruled that the IRS is entitled to tax tips received by restaurant employees based on 'reasonable estimates' of the amount received.

The case had been brought by a famous San Francisco Italian restaurant, Fior d'Italia, which has been operating for 116 years and disputed an assessment for an extra $23,000 in Social Security taxes, based on credit card receipts and cash estimates.

Originally the San Francisco-based 9th Circuit Court of Appeals had ruled that the IRS should stop using estimates of tips to assess taxes, since it could not prove that people who paid with cash tipped 14%, but the Supreme Court's definitive ruling will now apply to more than 200,000 restaurants, as well as numerous other types of establishment where tipping is the norm, such as hotels, night clubs and worse.

The ruling is bound to be inflationary, with many more restaurants tacking on standard 15% 'voluntary' service charges to bills. Of course that doesn't stop the waitress from expecting more out of your pocket, which she hopes won't be taxed. You had to pay tax on it, of course, already, unless you're a mobster or a 'night-worker', and if you're reading tax-news.com that's unlikely . . .

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