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IRS ruling changes the game for auto gratuity

New tips ruling

Excerpt from Internal Revenue Service's new ruling:

Topic 761 - Tips – Withholding and Reporting

Service charges added to a bill or fixed by the employer that the customer must pay, when paid to an employee, will not constitute a tip but rather constitute non-tip wages. These non-tip wages are subject to Social Security tax, Medicar...e tax, and federal income tax withholding. In addition, the employer cannot use these non-tip wages when computing the credit available to employers under section 45B of the Internal Revenue Code, because these amounts are not "tips." Common examples of service charges (sometimes called "auto-gratuities") in service industries are:

• Large Party Charge (restaurant),

• Bottle Service Charge (restaurant and nightclub),

• Room Service Charge (hotel and resort),

• Contracted Luggage Assistance Charge (hotel and resort), and

• Mandated Delivery Charge (pizza or other retail deliveries).

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