Does your restaurant charge a mandatory tip for groups larger than six patrons?
If so, then you need to be aware that starting January 1, 2014 the IRS will now consider these mandatory tips as employee wages rather than tips. Moreover, these wages do not qualify for FICA tip credit under Internal Revenue Code section 45B.
Due to a recent IRS Revenue Ruling explaining the difference between a tip and service charge, and emphasizing that services charges are wages, as a restaurant owner you will want to be aware that the IRS will likely begin enforcing the service charge versus tip distinction by auditing restaurants to ensure that service charges are being properly classified and reported.
While both service charges and tips are subject to employment taxes, this new ruling will have significant implications for businesses that had been treating mandatory tips as tips rather than wages since there are different reporting obligations associated with each category.
Also, beside the employment tax issues, restaurant owners will want to consider the employment law implications, of this new IRS ruling because, as wages, mandatory tips will impact the regular rate of pay for hourly employees.
At Gedeon Law & CPA, we regularly advise restaurant clients on both tax and employment related matters to ensure they are properly reporting and classifying mandatory tips for both tax and hourly rate-calculation purposes.