If you require gratuity – it is taxed . . .

June 28, 2013

In June of 2012 the IRS clarified the difference between a tip and a service charge. Under the Federal Insurance Contributions Act (why insurance, I don’t know) the IRS determined that “automatic gratuities are service charges . . . .” They also decided that automatic gratuities (i.e., service charges) are taxable because they are not voluntary.To address this issue many operators are simply stopping the “automatic gratuity” for large parties as these would come under the classification that the IRS has stated. We agree with that move and recommend you consider that move yourself. If there are no circumstances wherein the customer is “required” to provide a gratuity over and above the amount of the meal, you will always be safe from issues during an audit.

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