New IRS Rule on Tips Leads to Uncertainty for Restaurants
Posted on: October 2nd, 2013

A recently released tax rule from the IRS has caused many restaurants to rethink their practice of adding automatic tips to the tabs of large parties.  Starting early next year, the IRS will begin classifying automatic gratuities as “service charges” meaning that the tips will be considered regular wages and subject to payroll tax withholding.

As described in a recent Wall Street Journal article , the new rule means more paperwork and added compliance costs for restaurants, as well as a potential financial hit for waiters and waitresses who live on their tips but don’t always report them fully. Restaurants are required to report to the IRS what its employees report for tips received and to pay Medicare and Social Security taxes on those amounts.  Restaurants are eligible for an income-tax credit for some or all of those payments, but service charges are not eligible.

The change will complicate payroll accounting for restaurants that stick with automatic tips because they will need to factor those tips into pay.  The new rule is especially unwelcome in light of the increased costs and record keeping requirements of President Obama’s new health care law, due to kick in later this year. For more information on this and other issues related to payroll and tax reporting, visit with an experienced attorney at the McCleskey Law Firm today.

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