Question

Anne is a full-time student at UCLA buts works part-time as a waitress at a diner near her dormitory. She earns an hourly wage but also receives tips as part of her compensation. Last month she collected $51 in tips while working night shifts in the diner. What obligation does she have regarding these tips

Answer 1

In California, if the tip is included in the service charge, Anne's employer must pay taxes for them. The employer is required to pay for these taxes in California, not the employee. Even though tips are not part of an employee's wage, they are still taxable. This means that Anne must include the $51 in her AGI.