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December 19, 2012

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IRS: New service charge reporting rules coming

Some restaurants will have more time to comply with changes

Do you or your employees know the difference between a tip and service charge? This summer, the Internal Revenue Service (IRS) updated and clarified their definitions of gratuity payments and how they must be reported. The rules, while simply a clarification of existing statues, can still be frustratingly complicated and confusing to operators.

The new regulations are enforceable beginning Jan. 1, 2013, though the IRS announced on Dec. 13 it would give some businesses another year to comply. For example, if a business must update its systems or policies to make appropriate reporting possible, the IRS will grant another calendar year before enforcing the regulation.

The IRS is specific to note, however, that this leniency will only be given due to "very limited facts and circumstances."

Federally, the IRS defines what constitutes a "tip" versus a "service charge." In most instances, a tip is an amount that the customer gives compulsion free, with unrestricted rights to determine the amounts. The payment cannot be dictated by employer policy and the customer gets to determine who receives the payment. These tips are subject to FICA taxes and income tax withholding if sufficient regular wages are present.

Service charges differ from tips in that they are considered regular wages by the IRS. Examples of service charges include mandatory gratuity added to a bill by a restaurant for large groups or other special circumstances or events. In the instance of a service charge, it is the employers responsibility to withhold all applicable taxes, just as they would with standard wages.

Still not entirely clear? The National Restaurant Association (NRA) has prepared a helpful PowerPoint webinar with detailed information and demonstrating real-world examples of situations the IRS regulations would affect.

Download the NRA's presentation here.

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