We dislike both the social security tax and withholding provisions. However, even if the withholding provision were deleted, we would still not be sure of the employer's liability to withhold taxes on tip income. The reason for this is that section 3403 of the Internal Revenue Code specifically makes the employer liable for withholding taxes on wages. Under this section, if an employer requires an accounting from an employee for tips, these may become wages for all purposes and the employer is required to withhold on them or face liability for payment himself.

Query: If the withholding provision in section 313 is deleted, would the language of that section still indirectly require the withholding of income taxes based on tipped income?

We are convinced that if a tax on tips is to be imposed for social security purposes, the most practical, beneficial, and least complicated way of handling the matter is to consider such tips as true self-employment income. This would avoid disputes between employer and employees, avoid disputes between unions, and put the employees on their own to pay taxes and to receive benefits based on the taxes that they pay.

There would be no difficulty in the computation of tax. The employer would pay his share of the social security tax on the employee's regular wages. Annually, the employee would declare his tips as self-employment income. The employee's tax on self-employment income for social security purposes would only apply to the extent that regular wages did not reach the required dollar base per year.

Testimony before the House Committee on Ways and Means indicates that the major objection to considering tip income as selfemployment income is "dilution" of the system. As one of the Government witnesses testified, however, the reason Congress originally adopted the self-employment approach is that the age of retirement is generally later for the self-employed. Congress felt that the delay in retirement would partially or totally offset the fact that the selfemployed annually contribute one-quarter less to the system than the combined employer-employee contribution. This reasoning is particularly applicable to the situation as its exists in the lodging industry, for perhaps in no other industry are there a greater number of employees working beyond the normal retirement age. The reason for this is that employees in the innkeeping industry have pride in their position as "server of the public" and more often than not, as a matter of choice, work well into their latter years.

We firmly believe that the amount of tip income that an employee receives from a third party should be a matter between him and his Government. Nothing can be gained and only discord and confusion. can follow by attempting to make an employer a "middleman" between a hostile tip employee and his Government.

Senator WILLIAMS. Thank you, Mr. Packard. You have raised some excellent points here which I am sure will be considered by the committee.

Mr. PACKARD. Thank you, Senator Williams.

Senator WILLIAMS. The next witness is Mr. Leslie Scott, representing the National Restaurant Association.

STATEMENT OF LESLIE W. SCOTT, DIRECTOR, GOVERNMENT AFFAIRS COMMITTEE, NATIONAL RESTAURANT ASSOCIATION

Mr. SCOTT. Thank you, Mr. Chairman.

My name is Leslie Scott. I am president of Fred Harvey, Inc., a corporation with headquarters in Chicago, and I am appearing this morning for the National Restaurant Association of which I am a director and a member and past chairman of the Government affairs committee. I am also representing the American Motor Hotel Association, a trade association affiliated with the National Restaurant Association. Mr. S. Cooper Dawson, Jr., a past president and chairman of the governmental affairs committee of the American Motor Hotel Association will file a statement for inclusion in the record. I am accompanied here this morning by Mr. J. W. Putsch, of Kansas City, the chairman of our government affairs committee, and by our Washington counsel, Rear Adm. Ira H. Nunn.

The National Restaurant Association is the trade association of the food service industry. Through direct membership and affiliation with 135 State and local restaurant associations, it represents over 100,000 restaurants in the United States.

I am, as I have stated, now associated with the restaurant industry as president of Fred Harvey, Inc. Prior to that, I served for 10 years as a member of the faculty of Michigan State University as director of the School of Hotel and Restaurant Management, as assistant dean of the College of Business, and as director of continuing education. I am also a member of the Committee on Ethics of the National Collegiate Athletic Association.

The National Restaurant Association and the restaurant industry are not opposed to having tips count for social security purposes. On the contrary, we think that tips should count for all purposes; for social security, for income tax, and as a credit against wage requirements should the Fair Labor Standards Act be extended to cover our industry.

Tips constitute a very substantial part of the total income of many of the employees of our industry. It would be unfair and unreasonable to fail to recognize this. It would be equally unfair and unreasonable, however, to give recognition to tip income by treating tips as wages.

Tips are not really wages. The employer provides the surroundings and circumstances from which tips result, but he in no way participates in the tip transaction. He cannot control the amount of the tip. Actually, he is powerless to prevent tipping. Tips are unique. They are at best a hybrid form of income but most nearly like self-employment income. The tip employee is in effect a concessionaire. He is paid wages by his employer for doing his work. He receives tips from customers for doing his work well.

The National Restaurant Association agrees that tips should count for social security. We hope to show that the only reasonable, practical, and equitable way to provide social security benefits and protection is to treat tip income as "other" income-the self-employment Section 313 of H.R. 6675 requires employees who receive tips to report to their employers in writing, at regular intervals, the total amount of their actual tip income for the period covered. We would

expect these reports to be required on a weekly basis. The employer would have to withhold the Federal income and social security taxes due on the tip income from the wages of the employee. He would have to accept cash payments from his employees to cover these taxes if wages were insufficient to do so, but he could not withhold the tax on tips from any tips which might come into the employer's possession. Also, the employer would have to match the social security tax contribution of his employees.

Section 313 treats tips entirely as wages. We think this is not the proper approach. Treating tips purely as wages would create many problems and cause many hardships to restaurant employers.

Employees will resent having to report their tips to their employers. Most waiters and waitresses will not discuss their tips with anyone. Tips are never discussed or disclosed. The employee feels that the tips he receives arise from his personal relationship with his customer. To the waiter, that makes them his business and not that of his employer.

Many tipped employees feel that their employer has an adverse and hostile interest in their tip income. They feel that if they disclose their tips to the employer he would attempt to lower wages.

This fear of lower wages will in many cases result in the Government's receiving less income tax from tipped employees. Many employees will be reluctant to report truthfully for fear of having the double penalty of high taxes and lower wages.

Another morale problem would come from the fact that certain stations in most restaurants for one reason or another are better tip areas than others. The employees who have good tip stations now do not reveal their tips, but should tips be reported to employers, the employer will face the problem posed by employees vying for the choice spots.

The restaurant industry is completely dependent upon high morale and the continued good will of it speople. The waiter or waitress is the sales person of our industry. If they are required to report their tips to us, morale will suffer. Since our industry depends on continued good will for its success, business, too, will suffer if section 313 is enacted.

Most tip employees would notice a significant drop in takehome pay if section 313 is enacted into law. For most, it will mean about double the amount of taxes now with held. A person with weekly wages and tips of $40 each now has $5.35 withheld. His weekly withholdings would go to $12.98 next year if tax on tips is enacted, and withholdings on tips is done weekly. This is more than double the amount now withheld. This does not consider State income tax, union dues checkoff, insurance or other customary deductions such as payroll savings for purchase of U.S. Government bonds, and profit-sharing plans.

And even more importantly and dramatically, relations will suffer because in the not at all unusual case, the employee will get no paycheck at all, but a tax receipt instead.

A waitress could work 48 hours a week at $0.75 an hour and receive $5 a day in tips. This is a low figure, but if she were to pay her month's income and social security taxes out of one paycheck, she would be left with but $15.44 for her other deductions and herself.

However, if her tips averaged $10 per day she would get a Federal tax bill of $7.50 instead of a paycheck.

Even if the taxes were withheld weekly, there would be difficulties. Consider the case of a waiter with basic hourly wages of $0.87 receiving $4 an hour in tips and receiving $1.25 per day in meals while at work. He would have a wage due at the end of the week of $34.80 but his Federal tax bill alone would be $33.25. Thus, his paycheck next year even without other deductions could be no more than $1.55. As the social security tax rate goes up, even this small amount would be absorbed by the Federal taxes due.

The paycheck suffers so heavy a blow because section 313 makes tips the measure for withholding without the tip fund being available for withholding. Everything must come out of the paycheck.

Now, on pay day, the employee does not think of all he has made in tips. He realizes only that his paycheck has been drastically cut. He feels he has worked for next to nothing. Thus, morale suffers further.

The result of the lowered paycheck would be that employees would expect and demand that employers make up the difference, and soon, in effect, employers would be paying all of the tax.

Even without pressure for higher wages, section 313 would be very expensive to an industry with an already poor profit picture.

The tremendous bookkeeping burdens that would be imposed would be very expensive from the standpoint of time and personnel. Extra clerical personnel would have to be hired. The fluctuating nature of tip income would make it impossible for most large operators to continue the use of automated payroll systems. The provision of section 313 permitting estimates of tip income would not materially help because adjustments would have to be made to tips actually reported. Also, we do not know enough about tips accurately to estimate their amount for any given quarters.

The tax burden itself is considerable. Using now, figures from the Census Bureau, the annual estimated total sales in restaurants where tips are customarily received is $11.6 billion. Estimating tips at 15 percent of sales, and using 5-percent payments by the employer, the annual additional cost to the restaurant industry would be $88.4 million.

Now, using figures from the Internal Revenue Service, we find an annual estimated profit of $676.1 million in establishments in which tips are customarily received. Thus, enactment of section 313 would wipe out 13.1 percent of the profit in food service establishments where there is tipping.

This loss of profit would occur before we estimate the increased costs and burdens of bookkeeping, recordkeeping, and the additional personnel or overtime required to do the job.

Unlike all other costs of doing business, the employer would have absolutely no control over the tremendous costs imposed upon him by section 313. Enactment of section 313 would for the first time introduce into our law the requirement that an employer withhold and pay based on funds (tips) over which he has neither custody, possession, nor control, and of which he does not even have knowledge of the amount.

Employers would be entirely at the mercy of their employees as to the amount of tips reported. They would have no right to question the accuracy of the tip reports. Employees could report low when young or when not interested in social security or the payment of taxes. They could report high when approaching retirement in an effort to increase ultimate benefit payments. There would be no guarantee of accurate tip reporting. Bear in mind that many waiters and waitresses are young persons-students in many cases-and young married women who regard their work as temporary and do not expect to build up social security equities except as spouses.

Many restaurateurs when explaining the provisions of section 313 to their employees have found these employees quite concerned about it. Many tip employees have written their Senators and Congressmen to urge the elimination of the tips provision from the medicare bill.

Even within the union ranks there has not been uniformity of support for the treatment of tips as wages for social security and income tax purposes.

At the 34th General Convention of the Hotel and Restaurant Employees and Bartenders International Union held in Chicago April 22-27, 1957, the convention considered a Resolution No. 60 which was submitted by local No. 17 of Los Angeles. In this resolution, the members of Waiters Union Local No. 17 of Los Angeles expressed grave concern with a proposal supported by some affiliates of the International Union to institute legislation which would require tipped employees to report their gratuities to their employers. The purpose of this proposal was stated to be the provision of a basis for obtaining maximum social security coverage. The resolution expressed sympathy with the objective of the proposal, but resolved, among other things, to appeal to the convention to oppose and reject any resolution advocating the declaration of gratuities to employers. Resolution No. 60 was adopted with certain amendments not pertinent here, and Resolution No. 66, which would urge "amendment of the social security law so as to include gratuities in income reported for social security taxation and benefits according to a formula that can be adapted to the conditions in each State" was not adopted by the same convention.

During debate on Resolution No. 60, Mrs. Jackie Walsh of local No. 48 in San Francisco, a waitress local supported Resolution No. 69 and opposed the reporting of tips to employers for a number of reasons, and she said:

I certainly wish that there were a way to have the law amended-the social security law-which would grant the right to employees to have gratuities considered as any other income other than wages at the end of the year, just as a self-employed person or someone who has a small business is allowed to do, and they then could include in their social security benefits the tax payment allowed with the greater right than for the greater social security benefits.

Thus, employees and union leaders of the restaurant industry are not solidly behind section 313. This bill would not apply to restaurants only, however. It would affect bellmen, barbers, beauticians, parking lot attendants, doormen, redcaps, and many others in many industries. Even the Congress has tip employees in the barbershops and perhaps elsewhere. Many members of these other tip groups and their employees oppose section 313.