IRS Makes New Rules Regarding Tips | Patriot Software

IRS Makes New Rules Regarding Tips

tips and payrollRestaurant owners may need to reexamine the way they handle and report tips, according to a new IRS ruling. The IRS has imposed new rules concerning the service charges that some restaurants automatically add to customer bills, but then divide among employees as “tips.” According to the IRS:

  • Tips must be made free of compulsion;
  • The customer must have the right to determine the amount;
  • The amounts must not be subject to negotiation or employer policy; and
  • The customer has the right to decide who receives the payment.

Tips Example

For example, if a restaurant automatically adds an 18% charge to customer bills, and then distributes the amounts among restaurant staff, this would be considered a service charge. Under the IRS rules, these amounts would be considered taxable wages for FICA tax purposes.

However, if a restaurant merely suggests appropriate sample amounts on the check but leaves the tip area blank for the customer to determine the amount, that would be considered a tip, according to the IRS guidance. (See allocated tips)

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