Paying Taxes on Chauffeurs’ Tips: Let’s Challenge Unfair IRS Rules

Posted on February 1, 2003 by Sara Eastwood-McLean, LCT Publisher

Did you know that the higher the chauffeur tip is on your bill, the more money it costs you as the employer? Well it does and you’re not getting a single financial benefit from that tip. Think about it. Since you have to pay $0.18 worth of employee taxes on every dollar, then 18 percent tips is costing you more than a 10 percent tip and all the tip money is going to your chauffeur.

Don’t get me wrong: I’m not against chauffeurs earning tips. What I object to do is the IRS forcing employers to pay taxes on those tips on top of taxes paid on hourly wages. Tips should be kept separate. The operator should be able to claim this money as an “allocation,” which would absolve him or her from paying out any employee taxes on that tip money. From a tax standpoint, there is zero financial benefit to the employer on tips since all that money goes directly to the employee BUT the employer is compelled by law to pay taxes on it. How is this fair?

I think we, as an industry, should try to get the IRS to view tips, not as wages but as “gifts” which can be reported by the employer as an “allocation” at the end of the year. If we accomplished this, chauffeurs would be responsible for paying their own taxes and employers would no longer be required to pay any Social Security, unemployment tax, or any other payroll taxes for that matter. Yes, that would mean that chauffeurs would pay more taxes on those gratuities than before but I believe that’s justified. We should put the burden where the burden belongs. And the burden belongs on the person receiving the gift (by law a gift is taxable income). The only reason the weight of this gets foisted onto the employer is because it’s easier for the IRS to monitor a business than it is to watch over many individuals.

Here’s the challenge that we fact with the IRS when arguing on this issue. When an owner builds the tip into the overall ride via billings the IRS will likely rule that this is a mandatory tip and is thus a wage. Our comeback should be that even though the majority of our clients prefer the tip to be included on the bill, that tip it is still a separate item on the bill. Also, tips aren’t really mandatory. More correctly, they are assumed or automatically applied at clients’ requests. Tips can definitely be disputed and removed from the bill if a client is unhappy with the service performed by the chauffeur. Importantly, clients always have the option of having the tip included on the final bill for convenience sake or paying drivers with cash. Corporate accounts typically opt for direct billing because it’s more agreeable for them.

For the record, the hospitality industry argued this case and was awarded a huge concession. In the food and beverage business, employers must declare a minimum 8 percent of their employee tips to the IRS. However, they are allowed to declare this is an “allocation” – the key word for NOT having to pay any FICA, unemployment or any other employee tax. So why can’t we do the same? Think about it: Owners could put that 18 percent tax they pay (with no direct benefit) straight to the net profit of their company!

This might be well worth the National Limousine Association’s time to pursue. If it succeeded in creating a special circumstance for our industry on the federal level by negotiating a deal with the IRS, then chances are very high that states would comply as well.


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