Scarinci Hollenbeck, LLC
The Firm
201-896-4100 info@sh-law.comFirm Insights
IRS to Count Automatic Gratuities as Wages
Author: Scarinci Hollenbeck, LLC
Date: September 27, 2013
Key Contacts
Back
The Internal Revenue Service has provided a great deal more guidance on how tips extended to waiters and waitresses, hair stylists, and other professionals should be reported for federal tax purposes. However, the agency recently announced a new policy governing the tax treatment of automatic gratuities, which may change the way that restaurants charge large parties in the future.
Under the new tax law, automatic gratuities – such as the popular 18 percent tax for large parties – will be treated and taxed as wages, rather than self-reported tips. Automatic gratuities – or service charges as they are now called – are those charged for large tables, and the charges are built into the bill and currently count as tips that are not subject to payroll tax withholding. Under the new rule, service charges will be subject to payroll tax withholding. This, in turn, may raise costs for restaurants, the Wall Street Journal reports.
Already, some restaurants are considering eliminating these types of tips altogether, including Darden Restaurants, which owns Olive Garden and Red Lobster. This scenario could also have an averse effect on waiters and waitresses who make less than the minimum wage, as these gratuities often help these workers at least reach minimum wage, the Daily Caller reports. The rule initially went into effect in 2012, but was pushed back to January 2014 to give restaurants time to comply with the new mandate.
“The change would mean more paperwork and added costs for the restaurants – and a potential financial hit for waiters and waitresses who live on their tips but don’t always report them fully,” according to the Journal.
The IRS says the absence of any of these four factors indicates that gratuity may be a service charge: The payment must be made free from compulsion, the customer must have the unrestricted right to determine the amount, the payment should not be the subject of negotiation or dictated by employer policy and the customer has the right to determine who receives the payment.
- Practices: Tax and Trusts & Estates, Sophisticated Estate Planning & Wealth Preservation
- Locations: Red Bank, NJ, New York City, Little Falls, NJ
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Related Posts
See all
Supreme Court and Title VII: Implications for Reverse Discrimination
Earlier this month, the U.S. Supreme Court issued a decision in Ames v. Ohio Department of Youth Services vitiating the so-called “background circumstances” test required by half of federal circuit courts.1 The background circumstances test required majority group plaintiffs pleading discrimination under Title VII of the Civil Rights Act to meet a heightened pleading standard […]
Author: Matthew F. Mimnaugh
SPACs Are Back, What You Need to Know
Special purpose acquisition companies (better known as SPACs) appear to be making a comeback. SPAC offerings for 2025 have already nearly surpassed last year’s totals, with additional transactions in the pipeline. SPACs last experienced a boom between 2020–2021, with approximately 600 U.S. companies raising a record $163 billion in 2021. Notable companies that went public […]
Author: Dan Brecher
Short Form Merger: Streamlining the Process for Businesses
Merging two companies is a complex legal and business transaction. A short form merger, in which an acquiring company merges with a subsidiary corporation, offers a more streamlined process that involves important corporate governance considerations. A short form merger, in which an acquiring company merges with a subsidiary corporation, offers a more streamlined process. However, […]
Author: Dan Brecher
Tariff Response Options for Small Businesses Facing Financial Distress
The Trump Administration’s new tariffs are having an oversized impact on small businesses, which already tend to operate on razor thin margins. Many businesses have been forced to raise prices, find new suppliers, lay off staff, and delay growth plans. For businesses facing even more dire financial circumstances, there are additional tariff response options, including […]
Author: Brian D. Spector
Common Causes of Partnership Disputes and How to Resolve Them
Business partnerships, much like marriages, function exceptionally well when partners are aligned but can become challenging when disagreements arise. Partnership disputes often stem from conflicts over business strategy, financial management, and unclear role definitions among partners. Understanding Business Partnership Conflicts Partnership conflicts place significant stress on businesses, making proactive measures essential. Partnerships should establish detailed […]
Author: Christopher D. Warren
Businesses Are Facing Financial Headwinds—A Practical Guide
*** The original article was featured on Bloomberg Tax, April 28, 2025 — As a tax attorney who spends much of my time helping people and companies who have large, unresolved issues with the IRS or one or more state tax departments, it often occurs to me that the best service that I can provide […]
Author: Scott H. Novak
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.