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How to Handle Industry Standard Service Charges
What Constitutes an Industry Standard Service Charge?
The IRS has made recent changes that directly impact industries such as restaurants and hospitality regarding the categorization of industry standard service charges. Are you aware of IRS Revenue Ruling 2012-18? This ruling states that service charges are no longer considered tips, but should be treated as non-tip wages. For example, if a business adds service charges, such as auto-gratuities, to customers’ bills which it distributes to employees, the business should characterize the distributed service charges as non-tip wages, not as tips.
According to the IRS’s e-News for Payroll Providers, common examples of industry-standard service charges or auto-gratuities are:
- Large Party Charge (restaurant)
- Bottle Service Charge (restaurant and nightclub)
- Room Service Charge (hotel and resort)
- Contracted Luggage Assistance (hotel and resort)
- Mandated Delivery Charge (pizza or other retail deliveries)
This tax treatment of industry standard service charges affects both social security and Medicare taxes imposed on tips under the Federal Insurance Contributions Act (FICA). It is important to keep in mind that the circumstances and facts around a payment are the determinative factors in how the payment should be properly treated, not the employer’s or employee’s characterization.
As of December 10, Revenue Procedure 2012-50 was released. This announcement extends the time for businesses to comply with the rules regarding proper treatment of industry standard service charges specified in Revenue Ruling 2012-18. This extension is provided in order to allow businesses not currently in compliance additional time to modify their business practices and make needed system changes. Based on public comments received, the extension has been set as January 1, 2014.
For additional information, please see Revenue Procedure 2012-50.
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