As I understand it.... You pay taxes on your tips EVEN IF YOU DON’T COLLECT ‘EM.
The IRS assumes you made ‘em.
Back in the 1980’s with the tax simplification laws the idea was to lower rates and expand the base.
Tipped employees were notorious at not reporting and businesses didn’t usually make them. Before the law change it was common, especially in big cities, for the IRS to send out agents as customers who’d tip big and them show up at payroll time to see if they reported it.
They also looked into the lifestyle of the employee. A bartender, for example, reporting so much income but driving a new Corvette would be targeted.
After the laws changed the government started the 8% rule as a minimum. If the tipped employee (minimum wage for them back then was about $1.35 and even today it’s $2.35 or $2.50...any more is the decision of the employer) doesn’t report at least 8% they are taxed upwards as if they were.
This all became moot with the increased use of credit cards and charge tips. Most tips now are charged on the cards. Employers can wait to put those on their paychecks which is taxed or pay it out nightly in cash from the register. But they then have to report that also because there is a trail of the employee getting the tip.
Tipped employees in my day lived daily on the cash and the change to paying them weekly or bi-weekly took time.
Also, if they don’t report all of their tips their earnings are reflected with Social Security so they would get less from that when they retire.