So, are you saying that the IRS knows how much the lunch tab was for every table you served? Somehow, I sincerely doubt that.
The IRS will tax you on your W-2 earnings, and your REPORTED tips. And we are all well aware that every server always reports every dime of tip they get a night, right?
Sorry, I was wrong, it’s 8%.
http://www.irs.gov/businesses/small/industries/article/0,,id=98401,00.html
“As an employer, you must ensure that the total tip income reported to you during any pay period is, at a minimum, equal to 8% of your total receipts for that period.
In calculating 8% of total receipts, you do not include nonallocable receipts. Nonallocable receipts are defined as receipts for carry out sales and receipts with a service charge added of 10% or more.
When the total reported to you is less than 8%, you must allocate the difference between the actual tip income reported and 8% of gross receipts. There are three methods for allocating tip income:
Gross Receipt Method
Hours Worked Method
Good Faith Agreement
Employers can request a lower rate (but not lower than 2%) for tip allocation purposes by submitting an application to the IRS. Detailed instructions for computing allocation of tips, reporting allocated tips to employees, and for requesting a lower rate can be found in the Instructions for Form 8027. (PDF)
Note: The amount shown as allocated tip income is for information purposes only. You are not required to withhold Income or Social Security taxes on the allocated tip income. The amount of tip income allocated to each employee is shown in box 8 of their Form W-2.”
And of course tips on credit cards do leave a trail.