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.
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.
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