Review of IRS Tax Topic 761: Tips – Withholding and Reporting


Automatic Gratuities at Restaurants Are Now Subject to Withholding

Starting January 1, 2014 if your business is making your customer’s pay a certain tip percentage (i.e., 18% gratuity included) and not leaving it up to the discretion of the customer, according to IRS Tax Topic 761, those imposed gratuities will now be considered a service charge and not a tip.

What that means is that these service charges will need to be tracked separately from tips since the employee will not be walking out the door at the end of the night with them, instead the employer will include it in their paycheck. In addition these service charges will not be included in the tip credit calculation.

If you are a LionWise POS customer, tips and service charges are already separated on the payroll reports so from a reporting standpoint you’re covered. If you want to start withholding these service charges from the staff’s walking away money each night then you simply need to remove these services charges from the ‘tips paid’ calculation on the checkout reports by making the quick configuration change in BackOffice and selecting the ‘Employee service charges are paid in payroll’ checkbox on the “Options” tab in the “Application Info” section.

If you find that this applies to your business you will want to think about informing your staff over the course of the next couple of weeks.

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