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IRS to begin enforcing tip vs. service charge rule in 2014

by on
in Office Management,Payroll Management

In 2012, the IRS issued Rev. Rul. 2012-18 (IRB 2012-26) in which it discussed the difference between tips and service charges, which is critical to when payroll taxes are due.

IRS: Regardless of what you call it, tips are amounts customers willingly determine and leave of their own accord; service charges, sometimes called automatic tips, are added to the bill. Tips are taxable when employees report them to their employers; service charges are immediately taxable.

The IRS later delayed enforcing this rule until 2014 (Announcement 2012-25, IRB 2012-52). Since no further delay is in the cards, restaurants should take one last look at their tip vs. service charge policy and begin to tax service charges as wages beginning Jan. 1, 2014. Twist: Service charges must also be added into employees’ pay rates for minimum wage and overtime purposes.

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