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Daily Archives: October 24, 2009

Staying ahead on taxes


Waiters in states that get paid below minimum wage have trouble meeting their tax obligations at tax time. This is because they don’t have hourly wages great enough to cover withholding, especially if they work in a state that allows an hourly wage of 2.13/hr. The shortfall can be anywhere between $500 and $3000 on April 15th, depending on the hourly wage and whether they have spouses, dependents, mortgages, extra deductions, etc.

This has nothing to do with the ole wives’ tale that waiters have to pay taxes on stiffs (99% of us don’t). This is simply a shortfall in income paid by the restaurant. And, the more successful a waiter is, the greater the gap between taxes withheld and taxes paid.

But there’s a simple solution that the government has been offering for the past 3 or 4 years – EFTPS.

What is this alphabet soup? It stands for “Electronic Federal Tax Payment System” and it’s a way to make electronic payments to your tax account. You can make payments once a day if you like. You can make payments over multiple tax years and for various categories like “Estimated Quarterly Payments”, and tax repayment agreements.

It’s a very handy system for making sure that you don’t get hit with a huge tax bill at tax time.

It is a little unwieldy of a system. First you sign up. Within 15 days, they’ll send you a PIN number. On the confirmation letter, you’ll find a toll-free number that you have to call to get an “internet password” as well as an “Enrollment Trace Number” which you have to supply in addition to the PIN. When you provide those two numbers, they will generate a random password for you, which you will use to access the system for the first time (you must have both your PIN and the internet password). As soon as you gain access, you change your password into something of your own choosing.

But once you’ve dispensed with all of that red tape, you’ll be able to make payments, even daily if you like. You can even set up automatic payments if you want, but I caution against doing that due to the irregularity of our income. What I do recommend though is setting aside at least 5% of your tips everyday (preferably 10%) to pay into the tax system. I would recommend doing it weekly. So, if you make $500 during a particular week, you need to pay in at least $25 (preferably $50). But even if you can’t do that much, you should send in something. Something is better than nothing.

What we sub-minimum wage states waiters tend to forget is that some of our tips actually don’t belong to us – they belong to Uncle Sam. Once we get this through our heads, we don’t have to scramble at tax time to come up with thousands of dollars or get hit with penalties for underpayment of taxes and fees for setting up payment plans. And there is no charge by the government for this service.

If you’re like me, you might realize that you have this tax obligation and set aside money in what I call an “escrow envelope”. Problem is, two months down the line, something comes up and the envelope is just too tempting to avoid looting. Estimated Quarterly Tax Payments have been burdensome in the past, what with the filling out of the forms and the mailing of the forms and the remembering to make the payment. So this is an easy way to stay ahead of the curve and avoid the temptation of spending money set aside for taxes or suffering from laziness or forgetfulness in making the payments. BTW, it’s a little-known fact among waiters that the IRS can penalize you simply for not making those quarterly payments if the amount that you owe is above a certain percentage of your income, even if you send your full payment in with your tax return. I’m not saying that they will, but they are authorized to do so.

Even if you think it’s too late for 2009, at least start preparing for 2010.

Here is the link for EFTPS:

PS, I am not a tax attorney so anything said here is based simply on personal experience and should not be construed as legal advice. The reader is responsible for his or her own due dilligence.