Tax on tips

[kathyc2]

Since we've run the OT through the mill, how about your take on tips?

(2) EXCLUSIONS.—Such term shall not include any amount received by an individual unless—



“(A) such amount is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor,


Taking this literally, would it mean the gratuity added to bill for such things as large parties is not excluded?

[Rapid Robert]

I agree. Just because the establishment calls it a gratuity does not make it so -- if it is not voluntary, it is properly a large group surcharge, not a tip.

[TaxGuyBill]

I agree.

https://www.irs.gov/irb/2012-26_IRB#RR-2012-18

https://www.irs.gov/pub/irs-news/FS-15-08.pdf

https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting

[Anarchrist]

(d) QUALIFIED TIPS.—For purposes of this section—
(1) I N GENERAL.—The term ‘qualified tips’ means cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary.
(2) EXCLUSIONS.—Such term shall not include any amount received by an individual unless—
(A) such amount is paid voluntarily without any consequence in the event of nonpayment, is not the subject of negotiation, and is determined by the payor,

All actions have consequences; therefore, a strict reading of the law disallows all tips.

Ignoring that, gratuities added to bills of large parties are subject to negotiation, have no legal consequences if not paid, and thus, are determined by the payor. If a tip added to the credit card slip or cash left on the table is considered w/o consequence, so are tips added to large parties' bills by the establishment.

[TaxGuyBill]

If a tip added to the credit card slip or cash left on the table is considered w/o consequence, so are tips added to large parties' bills by the establishment.

Have you looked at Revenue Ruling 2012-18 (the first link I gave above)? Q&A #1, Example A, seems to clearly say otherwise (while it is specifically referring to rules about FICA, it seems to clearly show what "tips" are and are-not).


"Example A: Restaurant W’s menu specifies that an 18% charge will be added to all bills for parties of 6 or more customers. Customer D’s bill for food and beverages for her party of 8 includes an amount on the “tip line” equal to 18% of the price for food and beverages and the total includes this amount. Restaurant W distributes this amount to the waitresses and bussers. Under these circumstances, Customer D did not have the unrestricted right to determine the amount of the payment because it was dictated by employer policy. Customer D did not make the payment free from compulsion. The 18% charge is not a tip within the meaning of section 3121 of the Code. The amount included on the tip line is a service charge dictated by Restaurant W."

[Rapid Robert]

So you (Anarchrist) are saying either all such payments are tips, or else none are? It seems you are saying that (d)(2) is meaningless because it does not define an exception.

You also wrote "have no legal consequences" but that is not the language of the law, it does not state "legal".

[Anarchrist]

The law clearly states that only voluntary tips paid w/ no consequence to non-payment qualify. The OBBB does not define consequence or put limits on the type of consequences (the word consequence only appears in the bill twice). All actions have consequences. Paying a tip is an action. Not paying a tip is an action. Therefore, not paying a tip always has consequences. Since not paying a tip always has consequences, no tips are qualified.

That's probably not what they intended, but it is how they wrote the law.


"dictated by employer policy. Customer D did not make the payment free from compulsion."
Customer D isn't an employee, so I'm not sure what employer policy comes into play. The irs reg assumes the customer is forced to pay this. That's not the case. Most, if not all, restaurants remove auto-grats when the customer demands. The only compulsion to pay the tip is peer pressure or societal norms. Those compulsions apply to all tips, so under this interpretation, once again, no tips are qualified.