“Tip” or “Service Charge” Rule

Restaurant owners and employees will be affected by an IRS rule going into effect this coming January. The “automatic gratuity” that many restaurants add to the bill for larger parties will be treated as a “service charge” rather than as a “tip.” Service charges are treated as regular wages subject to withholding by the employer. Tips, on the other hand, are reported as income by the restaurant employees receiving them. The ruling is likely to complicate bookkeeping and reporting for both restaurant employees and employers.