Gratuity Included? | Tax Tip of the Week | No. 225

We May Soon See An End To The "18% Gratuity Added" on menus--

That 18% service charge received for parties of eight or more will soon become taxable as wages subject to payroll taxes for food servers across the nation. Until now, these service charges were considered tips, and it was left to the wait staff to report them as income.Restaurants were given until January 2014 to comply with Rev. Rul. 2012-26, and time is up soon.The revenue ruling provides that the absence of any of the following factors indicates that the payment may be a service charge:•The payment must be made free from compulsion;•The customer must have the unrestricted right todetermine the amount;•The payment should not be the subject of negotiationor dictated by employer policy; and, generally,•The customer has the right to determine whoreceives the payment.Since service charges are not eligible for the business owner to take the tip credit claimed on Form 8846 and are not eligible for the general business credit claimed on Form 3800, it is expected that the chain restaurants will eliminate these automatic gratuities. In order to compete with the big boys, the smaller restaurants most likely will follow suit.Let us know if you see these changes occur at your favorite restaurants in 2014.You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt - the guy behind TTW...until next week.