Most people believe bartending is all about fun and fast cash. But when Uncle Sam and the IRS comes calling, the fun and cash dissipates.
April 15th is dooms day for so many bartenders and servers due to a lack of education and resources about taxes.
What is the difference between 1099 vs. W-2? How to avoid the big tax bill at the end of the year?
This blog is intended to be a follow up to our previous post. We will give you a little more insight into how bartenders and servers can better understand and prepare.
1099 vs W-2
Many businesses hire independent contractors (1099) versus employees (W-2) for a number of reasons. We focus on the difference between the two as it relates to the income tax liability.
The payroll taxes are automatically deducted from the paychecks of individuals that are classified as employees and receive a W-2. Once the taxes are automatically deducted from the paycheck it is the employer’s responsibility to pay them to the government. Be sure to verify with your manager that this is happening if you receive a W-2.
As an independent contractor, you are responsible for calculating and paying your own income taxes and submitting these payments to the government on a quarterly basis.
Employers often prefer hiring contractors (1099) vs. employees (W2) because they avoid paying the benefits they would offer employees, such as health insurance and life insurance. It can also be much easier to terminate a relationship with a contractor than with an employee.
Estimated Taxes
According to the IRS, individuals generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their annual tax return is filed. If you are a W-2 employee and receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. However, if you are an independent contractor and receive a 1099 then you may be required to make estimated tax payments.
You are not required to pay estimated tax for the current year if you meet all three of the following conditions.
- There is no tax liability for the prior year
- You were a U.S. citizen or resident for the whole year
- Your prior tax year covered a 12-month period
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. The easiest way to calculate your estimated tax payments is to pay either 100% of your previous year’s tax liability. Or you can pay 90% of your estimated current year tax bill.
It is important to note that if you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty to the IRS for underpayment of the estimated taxes.
Tip Income and Recordkeeping
Bartenders and servers are required to report their tip income to their employers monthly if you receive more than $20. These tips are considered wages and you should be paying payroll taxes on this income. However, there are times when your regular wages are not enough to cover the payroll taxes. When this happens, the withholdings should carry over to the next pay period or you can cover the amount due in cash.
If not enough withholding occurs during the year, then you may have a tax bill when you file your annual tax return. Proper tip reporting is important when dealing with the IRS.
Keeping precise tip records may prevent tax penalties in the event of an audit. When documenting tips you should include the following:
- Date
- Location
- Shift Worked
- Cash Tips Received
- Credit Card Tips Received
- Tip Outs paid to other bartenders or servers
While employers are required to withhold payroll taxes on employee tips, it is your responsibility to keep adequate documentation and to ensure that these records match your W-2.
Make sure you check out the initial thoughts on this topic. And if you have any questions about this blog, please email Natasha Smith, CPA at natasha@nasmithcpa.com or call 404-296-0050.
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