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Issue Number:  2012-7

Inside This Issue

1. Guidance on tax treatment of tips vs. service charges  

National Tip Reporting Program Manager Daniel R. Lauer will discuss Revenue Ruling 2012-18 and Announcement 2012-25 on the Aug. 2 payroll industry call.

Rev. Rul. 2012-18 provides guidance in a question-and-answer format regarding social security and Medicare taxes imposed on tips under the Federal Insurance Contributions Act (FICA), including information on distinguishing between tips and service charges, the credit under Sec. 45B for employer social security and Medicare taxes, and the rules for reporting the employer share of FICA under the notice and demand provisions of Sec. 3121(q).

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.

Although not listed in the revenue ruling, common examples of service charges or auto-gratuities in service industries are:

• Large Party Charge (restaurant)
• Bottle Service Charge (restaurant and night-club)
• Room Service Charge (hotel and resort)
• Contracted Luggage Assistance Charge (hotel and resort)
• Mandated Delivery Charge (pizza or other retail deliveries)

The facts and circumstances around a payment are the determinative factors in the proper treatment of a payment, not the employer’s or employee’s characterization.

Rev. Rul. 2012-18 is effective immediately and should be, with limited exceptions as outlined in Announcement 2012-25, applied retroactively. 

Rev. Rul. 2012-18 supersedes the guidance in Rev. Rul. 95-7, 1995-1 C.B. 185.

Rev. Rul. 2012-18 is in Internal Revenue Bulletin 2012-26, dated June 25, 2012.

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