Sandra Fay •
Many businesses with employees who receive tips are not aware of what is a tip versus what is a wage.
The IRS defines service charges or automatic gratuities that a business imposes on its customers, as taxable wages when paid to an employee. This includes if the business imposes an automatic tip amount on large parties or a flat charge related to a function or banquet fee. Service charges are taxable wages, and subject to withholding and employer taxes. Only the amount paid to the employee is a wage. If the business keeps a portion, that amount is not a wage to the employee because they did not receive it.
Many businesses with employees who receive tips are not aware of what is a tip versus what is a wage.
The IRS defines service charges or automatic gratuities that a business imposes on its customers, as taxable wages when paid to an employee. This includes if the business imposes an automatic tip amount on large parties or a flat charge related to a function or banquet fee. Service charges are taxable wages, and subject to withholding and employer taxes. Only the amount paid to the employee is a wage. If the business keeps a portion, that amount is not a wage to the employee because they did not receive it.