Are automatic gratuities charged by restaurants tips or income?
- January 23, 2018
- David Greene
- Comments Off on Are automatic gratuities charged by restaurants tips or income?
In a recent Fact Sheet (No. 2017-08) the IRS reiterated that mandatory service charges such as automatic gratuities charged for large dining parties and banquet event fees charged by the restaurant are income to the restaurant and not tips. The restaurant may or may not give all or some of these charges to the servers. What they give to the servers must be counted and reported as non-tip income and taxes must be withheld. The difference in service charges and tips is that tips are discretionary payments determined by the diner voluntarily and he/she has the absolute right to determine the amount, if any, whereas the diner must pay the service charge and has no control over the amount.