How much tax do you pay on tips?

I have just started working as a hairdresser in a salon. What percentage of my tips should I save for taxes?

First point would be: estimate what you think you are going to make for 2008. Income tax is "pay as you go". Now subtract from your income your standard deduction and the number of exemptions you can claim. Example:
you make 30000 in salary and tips. You are single, support a dependant and can claim head of household {HOH}. You’ve got 15350 of taxable income {over-simplified; I’m giving an example}. Your tax is 1915. If you put the tips into stocks, savings, CD, HSA or something, you would be covered if you sent 500/quarter in estimated tax to the IRS. If this is not feasible, you should fill out the W-4 and only claim the number of exemptions you are entitled to. In the example above, the tax rate is 12.475%. So you can see that, even if you make little, you could be paying a pretty hefty sum in Federal taxes, and you have to allow for social security and probably State taxes. Hopefully you do not live in a high income tax State like California, North Dakota, Ohio, New York, New Jersey or Massachusetts. To answer your question, since you have to set aside 7.65% for social insecurity and medicare taxes, the amount you should set aside could be as high as 29%. It is best to invest in stocks or have a savings account, then send money in to the government in April, June, September and January. So from this, you may want to seriously look in to incorporating or starting a sole proprietorship. There are many expenses that you can deduct the business portion of in that instance. Now, there are many expenses you cannot deduct at all.

Second point would be this question: is your employer a participant in one of the following IRS programs:
Tip Rate Determination Agreement (TRDA)
Tip Reporting Alternative Commitment
Institute your own reporting system to comply with the tax law.

If so, your employer may be allocating tips and you will see this in Box 8 when you get your W-2. Ask your employer what percentage of sales he/she is allocating for you. This will help you to 1)project and 2) know if you are working during hours of peak volume or low volume. So you know if you are being taxed too heavily and if you will have to prepare figures and the statements in the event of an IRS audit.

Ask your employer to give you Publication 1244. All that is is a convenient log to keep tract of your tips. The IRS may publish this same "note pad" for years to come, so it will save the hassle of scrouging for paper to write down your tips {and tips due you because of "shared tips"}.

Above all, don’t go to H&R ripoff. In your situation, you may be able to do your taxes online using Turbotax or Tax act. If you do run in to problems, go to and look up an enrolled agent. They specialize in income taxes, are required to maintain their expertise through continuing professional education {So called "tax specialists", tax attorneys and CPA’s are not. They have to be enrolled agents} and are licensed to represent taxpayers and corporations before the IRS.