Self-employed 10 min

Tipped employees: 3 key ways to save more and pay less tax

From savings plans with perks to RRSP contributions through payroll deductions, there are a number of tricks you can use to reduce your tax bill.

By Fonds de solidarité FTQ

Customers often decide how much they’re going to tip on the fly based on the quality of the service they received—and how much they have in their bank account! There are also customers who systematically leave 15 percent, while others, not knowing any better, leave nothing at all. When you work in the service industry, tip earnings make a huge difference in your ability to save. Since tips make up a large part of your income, your yearly income varies, meaning your tax bill is equally unpredictable. Fortunately, there are a number of simple strategies you can use to lighten your tax load.

Bartenders and servers are likely first to come to mind when you hear “tipped employees,” but tipping is the norm in many other industries. Hotel employees, delivery persons, taxi and other drivers, beauty service employees (e.g., hair stylists and estheticians), massage therapists, housekeepers, and landscapers all receive tips.

Why it’s important to declare your tips

The tips you receive in exchange for the services you’ve worked to provide are your hard-earned dollars. Whether paid by card or in cash, they count towards your overall income, which means you must include your total tip earnings in your annual tax return.

It’s important to know what qualifies as a tip in the eyes of the tax authorities. In addition to gratuities you receive directly, you need to consider any pooled tips managed by either your employer or your co-workers. Whatever the case, all gratuities earned should be included in the statement of tips you submit to your employer before each payday so that they can make the correct tax deduction.

The thing about working in a tip-based business is that it’s impossible to predict your exact income. Your employer can’t see how much you’ve made or be certain of the applicable tax rate until the end of the year, when all your paycheques have been added up.

It’s entirely possible for you to bring in more tips than your boss anticipated. If this were to happen—here’s hoping!—you would be taxed throughout the year based on an estimated income below your actual earnings. Sounds like a pretty nice problem, doesn’t it? The downside is that you’d find yourself owing a certain amount once it came time to submit your tax return—that is, unless you planned ahead!

3 simple ways to lower your tax bill

01Contribute to an RRSP that offers additional tax savings

Putting a portion of your earnings into a registered retirement savings plan (RRSP) is always a good strategy for reducing your tax bill, as your contributions are deducted from your taxable income at year’s end. For example, if you earn $40,000 and contribute $5,000 to an RRSP, you receive an RRSP deduction of $1,375.

If you were to place that $5,000 in the Fonds de solidarité FTQ’s RRSP+, however, you’d save an additional $1,500 in tax, bringing your total tax savings for that $5,000 contribution to $2,875.1 In other words, it would cost you only $2,125 for an annual savings of $5,000. Try our tax savings calculator to see how much you could save with the RRSP+ based on your annual taxable income.

02Save gradually and automatically

It’s one thing to want to invest $5,000 in your RRSP by the end of the year, but it’s another to actually come up with the cash. Between bills, outings, trips to the mall, and that well-deserved vacation getaway, you may have precious few savings left in your bank account by the time tax season comes around. Don’t worry—you’re not the only one. Automatic savings are designed for precisely this reason. They might even become your financial secret weapon!

The strategy is simple. For starters, you can choose to make RRSP contributions through automatic withdrawals from your bank account or via payroll deductions (if this option is offered by your employer). For example, to invest an annual amount of $5,000 in the Fonds de solidarité FTQ, you would need to set up a weekly bank withdrawal of $96.15 for the 52 weeks of the year. You would receive a tax refund after reporting your income at the end of the tax year.

Smaller weekly contributions are far more palatable than $5,000 in one go. You may not even notice a difference in your finances if you factor them into your monthly expenses. Your retirement savings can therefore help cover the taxes you owe in the event that your income exceeds your employer’s projections. You can also adjust the amount of your contributions as your financial situation or savings goals evolve.2

If you’re a little behind on your contributions, don’t panic: you’ll have a chance to catch up at the start of the new year. RRSP contributions lower your taxable income for the year they were made, but any contributions made during the first 60 days of the following year must also be recorded on the previous year’s tax return. The only time you’re taxed for the income invested in an RRSP is when you make a withdrawal. The ideal time to cash out is once you’ve reached the golden years of retirement, when your tax rate is lower thanks to your more modest income.

03Contribute to a VRSP

Another option that allows you to benefit from payroll deductions is the voluntary retirement savings plan (VRSP). Under the Voluntary Retirement Savings Plans Act, employers with at least 10 employees must offer a VRSP or provide the opportunity for employees to contribute through payroll deductions to an RRSP, a tax-free savings account (TFSA), a labour fund, or a pension plan.

As a final piece of advice, tipped employees can also combine multiple strategies, such as contributing to an RRSP through payroll deductions, to avoid owing taxes at the end of the year. Speak to a financial advisor to explore your options and find out which solution is right for you.

Legal notes
Example based on the 2021 taxation year for an individual with an annual taxable income of $43,000, at a marginal rate of 27.5 percent, who gets paid 26 times a year and receives tax savings immediately on each paycheque. The amounts calculated are estimates and may vary depending on your tax status. The Fonds de solidarité FTQ’s shareholders will receive 15 percent in tax credits from the Quebec government and 15 percent from the federal government. They are capped at $1,500 per fiscal year, which represents a $5,000 purchase of shares of the Fonds de solidarité FTQ. Please read the prospectus before investing. Copies of the prospectus may be obtained at, from a local representative, or at the offices of the Fonds de solidarité FTQ. The shares of the Fonds de solidarité FTQ are not guaranteed; their value changes, and past performance may not be repeated.

It's your responsibility to ensure that your contributions qualify for RRSP deductions and are eligible for labour-sponsored fund tax credits.

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