To Collect or Not-To Collect: Thoughts on Cash Tips and the Affordable Care Act

Should Restaurant Owners Collect All Cash Tips?

Does the Affordable Care Act change your opinion?

One provision of the Affordable Care Act that most employers seem to understand by now, is that “Qualified Benefits” must be “Affordable.”

As I write this, an employee’s portion of benefit premiums must not exceed 9.5% of gross earnings, anything over 9.5% is considered “unaffordable,” and the employer could pay a penalty for not providing affordable insurance.

Explaining the intricacies of the ACA are for a different post, some of which you can find in my previous posts (click on the “ACA – Healthcare Bill” to the right under Categories to find them).

This is an example I’d like to run by you, and see what your thoughts are:

Lets say that Bill is a Server at Generic-Fancy-Restaurant

fancy waiterNow lets assume that Wages, Credit Card Tips and a Small Amount of Claimed Cash Tips equal $50,000 a year in Reported Earnings on the Bill’s W2.

With $50,000 in income, 9.5% of that equals $4,750

And lets say the Total Cost of Benefits for an Employee at Generic-Fancy-Restaurant is $30,000 a year

the Restaurant pays 80% of that, or $24,000 a year, that leaves $6,000 for Bill the Server to pay.

Right now Bill only has to pay $4,750 or his Benefits are considered Unaffordable, and if that is the case, his employer may face penalties.

What if the Restaurant collected all cash tips every night?

They would run those tips through their payroll system so everyone’s total earnings are accounted for, and accurately reported on their W2.

By collecting all Cash Tips the employer proves that Bill makes $70,000 a year

Bill’s portion of Premiums is $6,000, and his new $70,000 in claimed-earnings recalculate so that 9.5% of his earnings is now $6,650

The employer’s benefit option is now qualified as affordable

But at what cost?  Here are a few more things to consider…

10 Possible Consequences of the ACA:

  • Bill’s ability to take home cash every night is eliminated
  • his ability to under claim earnings is eliminated because all tips will be claimed
  • his take home pay will go down because he will be paying more taxes
  • The Employer must now manage the tip collection and re-payment process
  • is this a good things because people can no longer evade their tax burden?
  • the government could potentially receive additional income and payroll tax
  • will the Bill’s of the world need 2nd Jobs to cover the loss of cash earnings
  • Will restaurants collectively not offer benefits and pay the per-full-time-employee penalty because offering benefits, collecting tips, etc. is just too much to manage
  • Will restaurants not collect tips and risk their benefits being labeled as “unaffordable,” so they do not risk losing their best servers, bartenders, etc.
  • Could some restaurants add gratuity to all tabs, regardless of size and value, and eliminate the subjectivity of tips and all hidden income potential?

It will be interesting to see how this plays out.


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