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Distinguishing Between Tips and Service Charges

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The IRS has issued a fact sheet to remind employers that so-called “automatic gratuities” and any amounts imposed on the customer by the employer are service charges, not tips.

Some examples of service charges include automatic gratuities for large dining parties, bottle service charges at nightclubs and restaurants, and banquet event fees. The amount of service charges distributed to employees should be reported as non-tip wages, subject to tax withholding and filing requirements. In contrast, tips are discretionary payments determined and paid by a customer (directly or indirectly), the amount of which the customer has the unrestricted right to determine. Cash and non-cash tips are to be included in an employee’s gross income, subject to federal income taxes. To read more, click here.