How to comply with new IRS service charge rules

How to comply with new IRS service charge rules

Restaurants might want to rethink automatic gratuities, now that the IRS treats them differently than standard tips. • See more Finance articles

The Internal Revenue Service’s began enforcing Revenue Ruling 2012-18, which relates to the classification of tips as service charges, on January 1, 2014. Restaurant owners, managers and staff should understand what the IRS tips reporting rule entails.

Under the ruling, the agency now classifies automatic gratuities as service charges instead of tips. Accordingly, the IRS now treats service charges as regular wages, which means they must be reported for payroll tax withholding.

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