Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Jan 18, 2012

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One may ask them self what on Earth do these two things have to do with one another? Unless borrowers wait on tables themselves or make their income through tips in a different profession, the answer to that question may not be immediately obvious. However, to those whose primary income is derived from tips (an often unreported or underreported source), obtaining an auto loan proves to be no easy task. Since the full extent of tip wages is often not included on a waiter’s yearly tax report, their reported earnings tend to be far lower than what they actually earn. To a car loan provider, though, that matters not.


So how are restaurant waiters supposed to obtain an auto loan?


Report All Tips


When it comes to verifying one’s monthly and annual income, there is no better proof than one’s tax return. Pay stubs, for restaurant servers, are inaccurate since they usually only display their hourly income—which is usually minimum wage. Sometimes pay stubs will contain tips wages that have been reported to employers, but servers are notorious for underreporting their actual earnings in order to maximize their end-of-the-year tax return. This sort of move may yield a few hundred dollars at the end of the year, but the consequences can result in several thousand dollars.


“Why?” one might ask.


If a food server applies for an auto loan, lenders will ask for his or her monthly income in order to determine how much money the applicant can qualify for. If only provided with a simple paystub, the lender will be forced to believe the server makes minimum wage, and thus cannot afford an expensive car. Regardless of the server’s promises that he or she makes extra money in tips, the lender needs proof. Proof can only come when waiters report all of their earnings.


In the event a lender does approve someone with low reported income for an auto loan, that borrower will likely be thrown into the category of “subprime.” The label “subprime borrower” refers to those who are deemed risky and more likely than others to not pay their auto loan off (or on time). As a result, their auto loan rates will be higher than another, less risky applicant.


The IRS gives those who earn tips as compensation this advice when it comes to their reportable income:

  1. Keep a running tally of tip income and update that record after every shift. The IRS 1244 form is designed to help restaurant servers in keeping track of their daily wages.
  2. Tips, whether they be monetary or other items of value, are subject to federal income, Social Security, and Medicare taxes. As a result, a waiter should take special effort in reporting all tip wages as accurately as possible.
  3. Report all tips to employers. Many waiters only report credit card tips since those are usually the only type that have a paper trail. However a food server should report both cash and credit, since they both contribute to one’s total wages. Not only is it the law, but it also will more accurately update an individual’s yearly earnings.