The Internal Revenue Service
(IRS) has issued guidance to clarify for employers the difference between tips and service charges for FICA tax purposes. Rev. Rul. 2012-18
is effective immediately and retroactively.
The IRS indicates that if any of the following factors is missing, there is doubt the payment is a tip:
- The payment must be free from compulsion
- The customer must be able to determine the amount of the payment without restriction
- The payment cannot be negotiable or dictated by the employer, and
- The customer should generally have the right to decide who receives the payment.
The guidance also contains a specific example to help restaurants understand the difference between tips and service charges. The remainder of the question-and-answer guidance deals with tip reporting, issues related to the failure of employees to report their tips to employers and IRS rules for notice and demand for payment.
Because the IRS recognizes that some businesses may need to make changes to automated or manual reporting systems, so the tip vs. service charge portion of the guidance may be applied to amounts paid on or after January 1, 2013 in limited circumstances.
The information contained in this blog is not intended to be tax advice, is of a general nature, and is based on authorities that are subject to change. Application to your specific situation should be determined in consultation with your tax advisor. IRS Circular 230 Disclosure: Any tax advice in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party any matters addressed herein.