Over the past few weeks, most Americans received W2 forms which means that tax time is nearly upon us. The IRS is not known for ease of use and the unique nature of gratuity based income makes the taxes even trickier for service industry employees. Neat Pour consulted Dr. Mathew Zingoni, a business professor at the University of New Orleans. Given his home city, Zingoni is no stranger to the hospitality economy and he shared his go-to tips for industry workers with us.
How Much to Declare
“Legally, you should declare all of your tips. Clearly anything recorded by credit card must be noted because their is a paper trail. Plus, all cash tips,” the Professor noted. “However, as we all know that second number can’t be verified. So, it devolves into an honor system.”
However, Zingoni explained that honor is not the only incentive to declare all of your earnings. Cutting a few dollars off your tax bill now could haunt you later. “A lot of service industry people like to declare as little as possible so they pay as little as possible,” he said. “That’s very short term. What you declare on your taxes becomes your official income level. That means when you’re asking for a loan those are the numbers they look at. So, it can get frustrating if you want to buy a car. And a house, forget about it.”
Another key factor to keep in mind before under-reporting your tips is your employer. Remember that they could be tracking (if not reporting) the tips as well. In establishments that pool tips or track them for other reasons (like a strip club), there will likely be a very detailed paper trail. So, you probably want to keep that in mind before you lie to the government.
A final no-no is reporting only your credit card gratuities. “If your tips are captured electronically, be careful. The IRS will find it very suspicious that you had no cash tips,” cautioned our source. “They won’t audit you now; they’ll audit you later when you’re applying for something.”
DIY or a Pro
If you’ve flipped on a television in the last month, you’re probably aware that several services like H&R Block offer turn-key accounting services. Our expert posits that only hospitality workers in very specific categories will benefit financially from these professionals.
“If you just experienced a move, or if you’re a homeowner and you’re also paying interest on a student loan, then an H&R Block might be worth it,” elaborated Zingoni. “But, for most renters, the benefit is strictly for speed or ease of use. They’re probably not going to find you anything that will save you money unless you had a ‘life event’ in the last year.”
Zingoni suggests getting in front of your taxes early. He reminded us that simply doing the paperwork does not mean that you must file immediately. However, the completed step provides some necessary info to asses the larger picture. “Do them now. You don’t have to submit them. See if you’re getting refund or a bill. If you owe the government, you want to know that now. Know what you owe. No one wants to be surprised.”
Pros often remind clients that procrastinating on returns only serves to delay a check from the government. “Keep in mind, that you are supposed to have access to your tax docs by February 2. So, you don’t need to wait until April. You can do that now. You can get that refund now,” the professor urges. “That’s the deadline, not the do date. There is no need to wait.”
To Itemize or Not To Itemize
The biggest decision when filling out your tax forms is whether to itemize or take a standard deduction. Basically, this means that you can add up all of your tax deductible expenses or simply opt for a blanket deduction of $6,350.
The Professor said that unless you’re a property owner or donate thousands of dollars to charity annually, the blanket donation is generally the way to go. “Health insurance and in some cases student loans are deductions, but they won’t exceed the standard deductible. It’s really difficult to exceed that base write-off unless you own a home.”
A bonus benefit of the standard deduction is a simpler form. “The only document that you need to file that way is the 1040EZ which is pretty easy to navigate,” noted the finance pro.
Many people honestly do not know how much they pulled in tips over the past year. In these cases, consulting with co-workers to get a rough estimate might provide a short term fix. Moving forward, it’s time to start keeping some records.
“Some people like to keep a log on their phone of what they made each day,” suggested Zingoni. “The industry obviously works in patterns. The info helps with taxes, but it also gives them an idea when their busy shift were. It even helps when planning vacations.”
Tracking your taxes year-to-year is also important. “Always save your tax docs. Have them emailed to you if possible. Have copies going back,” stressed the pro. “Any time you’re in a loan situation, they’re going to ask for those back documents. Even HR will ask for previous returns.”
The New Tax Code
If you follow the news, likely you’ve heard about the new tax laws. This legislation will have some tangible effects like doubling the standard deduction. However, none of that matters as far as the taxes at hand are concerned. You are currently working on 2017 taxes which are governed by the old code. So, don’t worry the new laws now.
The Big Picture
Be sure to remember that your taxes do not exist in a vacuum. They are part of a larger ecosystem. “Financial health is like body health. Every aspect works together. Taxes, budgeting, your credit report all work together,” said Zingoni. “You don’t want to be like the guy who goes to the gym all the time, but eats McDonalds all the time. The two cancel each other out.”
The bottom line is ignore your financial health at your own risk. “If you want to enjoy yourself that’s fine, but know the ramifications. They’re not going away,” warned our finance guy.
If you need extra help, odds are that it might be right under your nose. Non-profit financial and tax assistance resources are fairly common. Your local university is a good place to start searching. Get on Google and check what resources are available to you.