IRS considers tips wages, shouldn’t you?

Approximately 8,800 Alaskans making minimum wage just got a pay raise. About half earn tips in addition to their hourly wages working in bars, restaurants and hotels.

The truth is, tipped workers make a lot more than minimum wage. And they should — it’s hard work, and when they provide excellent service, they earn more.

How much more? My members statewide say their employees make $20, $30 or $40 per hour in tips, and some even more. Recognizing this, Alaska Cabaret, Hotel, Restaurant and Retailers Association is proposing a new wage structure for tipped employees via House Bill 240, which the organization spent nearly a year crafting with the help of legislators and our members.

Here’s what we’re proposing: Tipped employees will earn at least $7.75 per hour, which is the current minimum wage. If an employee also makes at least $7.25 per hour in tips, an employer would be able to freeze the paid wage at $7.75 when the minimum wage goes up in the future.

An employee will be guaranteed at least $15 per hour before their employer can opt out of future minimum wage increases, or $31,200 per year for full-time workers.

Minimum wage was established in 1938 to address abuses proliferating in sweatshops. But many of today’s tipped employees earn $40,000 to $60,000 or more per year, so when employers have to raise their wages, it puts a significant pinch on their finances.

This system will help businesses like restaurants keep prices reasonable for their customers while they continue to operate on tight margins that average around 3 to 5 percent, making them the most likely of all business types to go under, according to the Small Business Administration.

Keeping track is easy — 85 percent to 90 percent of tips are left on credit card receipts, which are audited for the purpose of the federal payroll taxes employers must pay on employees’ tipped income.

The calculation is simple and won’t require fancy accounting software or other costs for employers. This existing paper trail would make it easy to clear up disputes if an employee felt his or her wage had been inappropriately calculated. Employees would continue to have the right to appeal any pay issues to the Department of Labor’s Wage and Hour Division.

There are a lot of good reasons for this legislation that are pro-business and pro-employee. In giving raises to people already making well over minimum wage, employers are less able to give raises to employees who don’t earn tips, like dishwashers or line cooks.

It also acknowledges what the IRS, the state of Alaska and lenders already know — tips are income. Employees and employers pay taxes on them, and bankers take them into account when considering loan applications and credit worthiness. This is why tipped income should be considered part of the minimum wage calculation.

House Bill 240 will be working its way through the Legislature, and we hope legislators will give it thoughtful consideration. We believe it will benefit thousands of Alaska businesses and their employees and help keep our private sector healthy.

Dale Fox is the president and CEO of Alaska CHARR, a trade association that represents restaurants, bars, package stores and hotels.