How to comply with the IRS tips reporting rule
Under the Revenue Ruling 2012-18, the agency now classifies automatic gratuities as service charges instead of tips. The IRS tips reporting rule now treats service charges as regular wages, which means they must be reported for payroll tax withholding. Previously, restaurants routinely charged automatic gratuity of, for example, 18-20 percent for parties of six to eight or more customers. Now, restaurants that do so will face a need to pay the higher minimum wage for their employees, a need to pay sales tax on automatic gratuities; and loss of the FICA tip credit.
Plus and minuses of automatic gratuities
Restaurant owners need to weigh the plus and minuses of automatic gratuities. Restaurants, bars, nightclubs, etc. may continue to suggest what they deem a fair gratuity. But if they want to avoid the consequences, they should cease the practice of automatic calculations of tips and allow tip amounts to be at the discretion of their customers.
Employees must report as income all tips they receive directly, charged tips paid to them by their employers and their share of any tips received under a tip-pool or tip-splitting arrangement they have with fellow workers in their reported gross income. Employees should also include as income, subject to tax, the value of any noncash tips they receive such as tickets, passes or other items of value.