Is it a Tip or Service Charge? – Restaurants 101

Restaurants make up 10% of the overall workforce here in the United States, with over 14 million people employed, according to the National Restaurant Association.  With so many moving parts, the restaurant industry can provide a multitude of issues for any owner, from a busy dinner service, to staff not showing up for shifts, to food spoilage.  The least of your worries should be your payroll, and partnering with the right service provider can help you eliminate some of the issues that may arise.  Here are a few items to look at to ensure that you and your restaurant are staying compliant.

One of the more confusing topics for employers and employees alike is the category of tips, with one of the most common questions pertaining to how much of their tips should an employee claim to the IRS?   The answer is shocking to many restaurant folks…100%.  That is, if make more than $20 a month in tips, because any amount under $20 per month is not required to be reported to the IRS.  To be frank, if you work in a restaurant and aren’t making $20 a month in tips, it may be time to find a new job.

Tips are defined by the IRS as “discretionary (optional or extra) payments determined by a customer that employees receive from customers” and includes the following:

  • Cash tips received directly from customers.
  • Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.
  • The value of any noncash tips, such as tickets, or other items of value.
  • Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangement.

Tips are not to be confused with service charges, because service charges that are distributed to employees should be treated the same as regular wages for tax withholding and filling purposes.  The IRS lists the absence of any of the following criteria as a determination that the payment received, might be a service charge.  It is important as an employer to categorizing your earnings properly throughout the year, so your taxes can be filed properly come tax season.  Again, the IRS has no definitive answer to the question, but only list the following criteria:

  •  The payment must be made free from compulsion;
  • The customer must have the unrestricted right to determine the amount;
  • The payment should not be the subject of negotiations or dictated by employer policy; and
  • Generally, the customer has the right to determine who receives the payment.

Charlotte Payroll offers a full in-the-cloud experience that maximizes efficiency. Our SaasHR platform can be tailored for businesses of any size to run on any device. Payroll can be processed in minutes, so you can focus on running your business. Schedule an appointment with one of our sales consultants to tailor a solution that fits your needs. Contact us today at (704) 887-5511.

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