When Is A Tip Not A Tip?

When it’s a service charge. On June 25, 2012, the Internal Revenue Service (IRS) issued Revenue Ruling 2012-34 which provides guidance to employers and employees on the difference between tips and service charges as well as on certain reporting requirements. The ruling states, among other things, that service charges paid to employees are taxable as regular wages and not as tips. Although the IRS delayed enforcement of Revenue Ruling 2012-34 to allow businesses time to make adjustments to comport with the new guidelines, the IRS will begin enforcement of classifying service charges as taxable wages this year.

Accordingly, it is now essential that every employer understand the difference between tips and service charges. The distinction is important as it impacts the employer as well as the employer’s customers and employees. Unlike a tip, a required service charge is subject to a sales tax which must be collected from the customer and remitted by the employer to the taxing authority. As service charges are considered wages, they are subject to all standard wage withholding and reporting requirements. Further, such charges must be included in determining each employee’s base rate of pay for calculating overtime.

Unlike a mandatory service charge, a tip is free from compulsion. More specifically, although suggestions are not prohibited, the customer must be able to determine the amount of the payment without restriction. Finally, the customer should have the right to decide who receives the payment. If the standards for a tip are not met, the payment will likely be considered a service charge. Service charges are typically defined as non-negotiable or “standard” fees charged by an employer in connection with such services as room service, large party service, delivery service and bottle service.

This blog is presented under protest by the law firm of Ervin Cohen & Jessup LLP.  It is essentially the random thoughts and opinions of someone who lives in the trenches of the war that often is employment law–he/she may well be a little shell-shocked.  So if you are thinking “woohoo, I just landed some free legal advice that will fix all my problems!”, think again.  This is commentary, people, a sketchy overview of some current legal issue with a dose of humor, but commentary nonetheless; as if Dennis Miller were a lawyer…and still mildly amusing.  No legal advice here; you would have to pay real US currency for that (unless you are my mom, and even then there are limits).  But feel free to contact us with your questions and comments—who knows, we might even answer you.  And if you want to spread this stuff around, feel free to do so, but please keep it in its present form (‘cause you can’t mess with this kind of poetry).  Big news: Copyright 2014.  All rights reserved; yep, all of them.

If you have any questions about this article, contact the writer directly, assuming he or she was brave enough to attach their name to it.  If you have any questions regarding this blog or your life in general, contact Kelly O. Scott, Esq., commander in chief of this blog and Head Honcho (official legal title) of ECJ’s Employment Law Department, at (310) 281-6348.


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