The Internal Revenue Service (IRS) has announced that businesses will have additional time to make the changes needed to comply with the proper treatment of tips and service charges for purposes of FICA tax. The time for compliance is extended to January 1, 2014.
Revenue Ruling 2012-18 presents questions and answers regarding distinguishing between tips and service charges for purposes of FICA tax, the credit available for the excess tax an employer pays on tips, and rules for employers reporting tips as wages.
For a payment to be a tip, the following criteria must be met:
- The payment must be free from compulsion.
- The customer must be able to determine the amount of the payment without restriction.
- The payment cannot be negotiable or dictated by the employer.
- The customer should generally have the right to decide who receives the payment.
If any of the above criteria are not met, there is doubt that the payment is a tip. For example, a restaurant policy of automatically including an 18 percent charge to the bill of parties of six or more is a service charge, but a bill showing sample calculations of different tip amounts with the tip line blank (where the customer puts in an amount) is a tip.
The ruling was intended to be retroactive and effective immediately upon issuance, but because it requires many businesses to change their practices and make system changes to comply, it was delayed.
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