IRS to Count Automatic Gratuities as Wages

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IRS to Count Automatic Gratuities as Wages

by Joseph M. Donegan on September 27, 2013

The Internal Revenue Service has provided a great deal more guidance on how tips extended to waiters and waitresses, hair stylists, and other professionals should be reported for federal tax purposes. However, the agency recently announced a new policy governing the tax treatment of automatic gratuities, which may change the way that restaurants charge large parties in the future.

Under the new tax law, automatic gratuities - such as the popular 18 percent tax for large parties - will be treated and taxed as wages, rather than self-reported tips. Automatic gratuities - or service charges as they are now called - are those charged for large tables, and the charges are built into the bill and currently count as tips that are not subject to payroll tax withholding. Under the new rule, service charges will be subject to payroll tax withholding. This, in turn, may raise costs for restaurants, the Wall Street Journal reports.

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