By Alan Smithee

This one’s for all the service industry workers amongst our readers. NPR’s Marketplace show reported that the IRS is going to be stepping up enforcement on requiring bartenders and waiters to declare tips on their income tax. No word yet on whether they will be hitting the strip clubs next. Even though federal law, and Texas juries, prevent employers from using a tip pool to compensate non tipped employees the IRS still requires taxes.

I understand that very rarely do bar and restaurant owners offer tax tips to their employees, so here’s the deal: employees that are reimbursed primarily through tips are required to report all their tips to the employer who then adds it to the employees W-2. Here’s the link to the IRS page. Part of the reason for the IRS cracking down on tips is political, the country is in a budget crunch after all and any politician that proposes cuts to the largest social welfare programs is committing career suicide.

However, another part of the reason is because the size of the untaxed cash economy is, frankly, massive. In large states like Texas the estimates run well into the billions. According to a 2006 report from the Texas Comptroller’s Office the economic benefits of undocumented immigrants is $17.7 billion per year, which far outweighs the $2.6 billion in state services spent on them.

In smaller states the size of the underground economy is also substantial, estimates put the size of Hawaii’s underground economy at $1 billion in untaxed revenue. All of that just to tell bartenders and waiters, don’t forget to declare your tips when you file your income taxes next year.