The taxability of tips and gratuities is relatively simple.
If the tip is given voluntarily, then it's almost universally not taxable. So if you leave the money on the table, or if you add it to your credit card, there should be no tax on the tip.
However, it gets a little more complicated if it's a mandatory gratuity. What is a mandatory gratuity, you ask? You know those signs that say, "A charge of 17% will be added to the bill for parties of 6 or more." That's a mandatory gratuity. You also see these kinds of fees on bills for banquets and conferences.
The rules for mandatory gratuities obviously vary from state to state. But mandatory gratuities are usually not included in the taxable amount if they are separately stated and all of the money is paid to the employees.
This can present problems for the restaurant, though. They may not want the patrons to know that the employee isn't getting everything. I had a seminar participant who was the accountant for a country club. They charged the members a 25% "service fee" on every food and liquor bill. The members were asking why they had to pay tax since this was supposed to be the gratuity. It turns out that it wasn't all going to the employees. Here the members thought they were being big spenders and that the wait staff was getting all of that money. But in reality, the servers were getting 17% and the rest was going to the club. And the club didn't want the members to know. But because the tax had to be collected on the "service fee" the cat kind of got out of the bag.
In some states, there is an additional restriction even if the employee is getting all of the money. If that gratuity is being used against the tip credit for minimum wage purposes, it's still taxable. And, of course, there are some hardball states that just say, if it's a mandatory gratuity, it's taxable. Period.
The Sales Tax Guy
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