Mandatory service charges and their distribution among waitstaff have plagued the Hospitality industry for years. Federal courts interpret federal laws differently, and states have enacted their own statutes that keep employers in constant uncertainty, depending on where they are located. Also, tip pooling arrangements have been a regular part of many restaurant operations and are generally allowed by both federal and state law. However, there are limitations as to who can participate and how much can be contributed to the tip pool. Following is an overview of the guidelines involving tips, tip pooling and service charges and some suggestions on how to stay compliant.
Tip Versus Mandatory Service Charge -
In a ruling issued in June 2012, the Internal Revenue Service clarified the difference between a tip and a service charge for tax purposes under the Federal Insurance Contributions Act. The IRS determined that automatic gratuities (a percentage automatically added to a restaurant bill) are service charges rather than tips for tax purposes. Revenue Ruling 2012-18 also determined that to the extent any portion of a “service charge” is distributed to an employee, it is wages for FICA tax purposes.
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