If you own a hair salon, hotel or restaurant, click here to find out more about the difference between service charges and tips. These gratuities present Payroll Services in Brooklyn with challenges such as employee reporting, wage calculation and compliance with tax requirements.
Service Charges & Tips
The Internal Revenue Service has very specific taxation and reporting rules for gratuities and tips. The IRS defines tips as:
- Cash given to workers by customers
- Extra money given via electronic payment methods such as gift cards or credit and debit cards
- The monetary value of perks such as concert tickets
- Amounts received through programs such as tip splitting
Tips are different from service charges in that they are paid without coercion, and the customer determines the amount. Tip payments aren’t the result of company policy or negotiations, and customers generally decide who gets the payment.
Service charge examples include:
- Automatic gratuities attached to checks for large parties
- Event fees for banquets and receptions
- Package fees on cruises
- Service charges for hotel room rentals
- Bottle service fees at restaurants and nightclubs
Because some establishments retain a percentage of service charges, the Internal Revenue Service considers automatic gratuities to be business revenue, and the money given to staff is non-tipped wages.
Reporting Requirements For Tips and Service Charges
Employees must report all tips to employers & unless total tips for the month are under $20. Employees don’t have to report non-monetary tips, but both types count toward a worker’s annual gross income and are open to federal taxation. Staff who are tipped indirectly, such as cooks and busboys, must also report all tips to the employer.
For tax purposes, employers are required to keep tip records so Social Security, income taxes, and Medicare taxes are assessed accurately. Employers must also pay a share of Medicare and Social Security Taxes based on the wages paid to tipped workers, in addition to tip income. However, service charges divided among staff are taxed the same as conventional wages. Service charges and tips can make Payroll Services in Brooklyn a challenge, but a payroll service can help business owners stay compliant with tax laws.
