The IRS recently ruled on service charges that restaurnats add to large groups.  These are classified as regular wages rather than tips because they are not optional.  While this isn’t a change from the actual law it is a change for how service changes are handled in practice.  What does this mean for you and for your employees?  It depends on what you are doing now.

 

All tips are taxable wages and should be fully reported to you for tax withholdings and inclusion on Form W-2; however, in practice that doesn’t always happen the way that it should.  Tips can still be paid out at the end of the shift or kept by the employee in cash; however, they should be reported to the employer.  The IRS has form 4070 for the employees to use to report tips but it is very rarely used in practice.  Most employees just tell their employer how much they made in cash tips at the end of a shift or at the end of a pay period.  Service charges, non-voluntary gratuities, are and have been wages.  These should be added to the wages of the employee in every circumstance and should not be included in the tips line on the paystub or on Form W-2.

Because of the various and complex issues related to Tips, we have created a Tips Fact Sheet for you to use.