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ARTICLE · 23 SEPTEMBER 2013

IRS Will Begin Implementing New Service Charge Rules Effective January 1, 2014

Littler Mendelson
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In June 2012 the IRS issued Revenue Ruling 2012-18, explaining the difference between a tip and service charge, and emphasizing that services charges are wages.

United StatesEmployment and HR
William Weissman
William Weissman
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In June 2012 the IRS issued Revenue Ruling 2012-18, explaining the difference between a tip and service charge, and emphasizing that services charges are wages. While both service charges and tips are subject to employment taxes, there are different reporting obligations associated with each category. Also, importantly, as wages services charges do not qualify for FICA tip credit under Internal Revenue Code section 45B.

In order to give businesses time to transition their reporting systems in situations where they may have been treating services charges as tips rather than wages, the IRS delayed implementing its Revenue Ruling. The Ruling will now go into effect on January 1, 2014, and the IRS will begin enforcing the service charge versus tip distinction and take steps to ensure that service charges are being properly classified and reported.

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