Tips vs. Service Charge

My first job was waiting tables at a local restaurant for the summer. I made about  $0.50 an hour plus tips (this was a while back). The paychecks went into the bank for college but the tips were my spending money. Waitressing was something I did to earn school and spending money several times. I liked the job.

Recently, the IRS has released guidance on what to do about service charges a restaurant adds to the customer’s bill. These service charges could include extra charges for room service or large parties, delivery charges, bottle charges and luggage assistance charges. These charges are to be considered wages to the employees to whom they are distributed. They are not tips. Tips are under the control of the customer. The customer decides who will get the tip and how much they choose to give not give. A required charge added to the bill is a service charge and a gift decided on by the customer is a tip.

This distinction is not subject to negotiation by the employee and employer. The IRS has issued Rev. Rul. 2012-18 to explain all the procedures in regards to FICA and reporting.

So when you get a bill that includes a service charge, remember that your waiter/waitress doesn't get all that money. If the service warrants it, you should still leave a tip for them.

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Comments

[DavidFazioEA]

I too waited tables to save for college. I cringe now when I'm dining out and I see someone with a Groupon or similar deal talking about tipping on the discounted amount of the check. Here in MA waiters and waitresses make $2.13 an hour plus tips. Unless the service is just plain horrible, remember to tip on the pre-discounted amount.