September 18, 2014

Restaurants May Have to Change Tip Reporting Systems to Comply with IRS Ruling

Small business owners who run restaurants or other businesses where tipping is customary may have to make some changes within the next year. The Internal Revenue Service has imposed some new rules regarding taxes imposed on tips that impact both employees and employers of service-based businesses. Some small businesses may have to adjust their automated or manual reporting systems for tips and service charges in order to comply with the new ruling.

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For employers, the new ruling states that all service charges paid to employees that meet the guidelines for the new ruling are deemed as paid by the employer for FICA tax purposes.

The IRS has imposed some guidelines to help determine whether funds paid to employees are to be considered tips or wages. According to the IRS’s official announcement, tips must be made free of compulsion; the customer must have the unrestricted right to determine the amount; the payment should not be the subject of negotiation or dictated by employer policy; and generally, the customer has the right to determine who receives the payment.

If there is any doubt relating to any of those qualifications, then the payment is deemed a service charge rather than a tip, and employers can be held responsible for any FICA taxes related to those wages.

There are more guidelines included in the official IRS bulletin, as well as a question and answer section to help both employers and employees understand what their responsibilities are regarding the new ruling.

In some cases, the IRS may only apply the new ruling to charges made on or after January 1, 2013 in order to give businesses the necessary time to amend their business practices.

The IRS is also accepting public comments regarding the new guidelines and whether additional time is required to guarantee that systems are compliant. Comments can be submitted electronically to TIP.Program@irs.gov or in writing to: International Revenue Service, National Tip Reporting Compliance, 3251 North Evergreen Drive NE, Grand Rapids, MI 49525.

For more information, see the IRS’s official announcement and official ruling.

Tip Photo via Shutterstock

4 Comments ▼

Annie Pilon - Staff Writer


Annie Pilon Annie Pilon is a staff writer for Small Business Trends, covering entrepreneur profiles and feature stories. She is a freelance writer specializing in marketing, social media, and creative topics. When she’s not writing for her various freelance projects or her personal blog Wattlebird, she can be found exploring all that her home state of Michigan has to offer.

4 Reactions

  1. Do we need more red tape and regulations, or less? In Europe tip is “included” in the bill.

  2. I bet this is the end of automatic 18% service charges on large parties. It seems like this would fall in the IRS’ new description and subject the restaurant to FICA tax. Although the customer could change the charge or dispute it, it may be considered a negotiation.

    Similar argument could be made for the “delivery charge” for room service which is sometimes (though not always) considered the tip.

  3. This is awful. Whenever the government gets involved everyone loses.

  4. I am 52 . Will I live long enough to see one single GOOD news about government taxing it’s people ?

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