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ARTICLE · 24 SEPTEMBER 2013

Serving Up Trouble: IRS Ruling On Automatic Tips

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Restaurants and other employers in the hospitality industry are reminded that, as of January 2014, the Internal Revenue Service will expect businesses to comply fully with its Revenue Ruling 2012-18.

United StatesEmployment and HR
Amy J. Traub
Amy J. Traub
Laura Scully
Laura Scully
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Restaurants and other employers in the hospitality industry are reminded that, as of January 2014, the Internal Revenue Service (IRS) will expect businesses to comply fully with its Revenue Ruling 2012-18.  Among other things, this Ruling distinguishes between "tips" and "service charges."  This distinction is key, as the IRS only considers the latter wages, and this classification affects tax withholding, credits, and reporting, as well as wage and hour compliance.

If they have not already done so, businesses with tipped employees should critically assess their practices with respect to automatic tips.  For example, the Ruling especially impacts restaurants and their longstanding practice of adding automatic service charges or gratuities to bills for parties over a certain number.

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