Tax Tips for Service Industry Employees

REPORTING TIPS AND GRATUITIES

Many workers in the service industry receive tips as a regular part of their income. Employees must keep track of their own tip and gratuity income and report the amount on their taxes.  The full amount received as tip and gratuity income is fully taxable and is reported on Line 104 of the T1 General.

According to the Canada Revenue Agency (CRA), waiters and waitresses typically earn between 100% to 400% of their wages in tips, depending on the type of establishment.  In the past, CRA has cracked down on persons who have missed reporting tips.

If you do not report tips, CRA may exercise its own judgement as to the amount received and assess penalties for not reporting income.  Not a good thing.  Unless you can prove otherwise, if CRA disagrees with you and increases the amount of income you have reported, it could lead to a painful re-assessment tax bill, that could go back a number of years.

So how do you safeguard yourself?  Unfortunately, there is no way to be bulletproof.  But there is one simple way that might help.  Keep a logbook or diary of all tips and gratuities received.
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After every shift, document the date and the amount received.  This way you can show them when you earned the gratuity, and in what amount.  This does not mean that you will never be challenged by CRA, but it certainly will help if you can show a record of the gratuities earned.

Also keep in mind that all your co-workers report their tips and gratuities, and CRA has that information.  So, CRA knows the average and the range of tips and gratuities reported where you work and at similar establishments.

There is an upside to reporting tips and gratuities.  The amount of Canada Pension Plan that you will ultimately receive is tied to the amount of income you report during your working days. Higher income reported today leads to higher pension cheques in the future.

Working Enterprises Tax Services Ltd. provides personal income tax preparation and independent financial services for members.