Restaurants Charging a Flat Fee for a Party of Six or More

Dear M & M:

Can restaurants charge a flat fee for a party of six or more and call it a tip?

– Mr. M

Dear Mr. M:  

Yes, a restaurant can charge a flat fee, but if paid to the waiter or waitress it is technically part of the workers’ wages not part of tip income. The employer must pay payroll taxes on service fees paid to workers as wages.

Here is the official IRS ruling, “The absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: The payment must be made free from compulsion; The customer must have the unrestricted right to determine the amount; The payment should not be the subject of negotiations or dictated by employer policy; and Generally, the customer has the right to determine who receives the payment.” Generally, the customer should be able to decide how much the tip will be and the customer should dictate who gets the tip.

The Internal Revenue Service rules automatic gratuities like adding a flat fee of 18% to the bill for a party of six or more are service charges, not tips – See Topic 761 – Tips – Withholding and Reporting. Employers should make sure they know the difference and how they report each to the IRS. Remember, tips are discretionary (optional or extra) payments determined by a customer that employees receive from customers. Certain factors are used to determine whether payments constitute tips or service charges.

Just because it is called a tip it might not be classified as a tip when paid to a worker. Again, the absence of any of the four factors listed earlier creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge. Examples of service charges commonly added to a customer’s check include: large dining party automatic gratuity (18% for a party of 12 or more), banquet event fee ($3 per person), cruise trip package fee ($50.00 tipping fee for baggage handlers), hotel room service charge ($5.00 per night), bottle service charge nightclubs, and restaurants ($3.00 per bottle).

Remember, service charges paid to workers should be reported as wages paid to the employee not as tips. Some employers keep a portion of the service charges and they are not required to pay any or all of the monies collected as services charges to their employees. If they do pay any portion of the monies collected that are service fees to the employee they are classified as wages.

Only the amounts distributed to employees are “non-tip” wages. Bottom line a tip is usually something a customer dictates how much extra they are willing to pay. “But what’s the big deal? While the “tip” versus “service charge” distinction may not seem too important to a customer, it may make a big difference to your server. That’s because a “tip” belongs to the server, according to the IRS, while a “service charge” may not.

So next time you’re dining out, take a close look at your bill. If you get to choose the amount you’re leaving, then you’re most likely leaving a tip. But, if you don’t get to choose the amount, then technically you’re paying a service charge — even if it’s called a mandatory “gratuity” on the receipt. “– Source: Findlaw.com is the service charge a tip? by Betty Wang

-M&M

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation(EDF) at 520-458-6948 or email  hollism@svedf.org

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