There are hundreds of Las Vegas hotels. Thousands, throughout the state of Nevada. Add the number of restaurants and other service oriented enterprises and one quickly realizes that tips paid to service personnel are part of the economic backbone in Las Vegas and the rest of Nevada. Recently, the IRS has issued Rev. Rul. 2012-18, to clarify for IRS examiners on how to determine when a payment is a tip or service charge for FICA tax purposes.
Section 3121(a) of the Internal Revenue Code defines “wages” for FICA tax purposes as all remuneration for employment, with certain exceptions. Section 3121(a)(12)(A) excludes from the definition of wages tips paid in any medium other than cash; section 3121(a)(12)(B) excludes cash tips received by an employee in any calendar month in the course of the employee’s employment by an employer unless the amount of the cash tips is $20 or more.
According to Rev. Rul. 2012-18, the IRS will use the four factors in Rev. Rul. 59-252 to determine when a payment is a tip or service charge. If the following four factors are present, the payment will generally be treated as a tip.
1. The payment is free from compulsion.
2. The customer is able to determine the amount of the payment without restriction.
3. The payment is not negotiable or dictated by the employer.
4. The customer has the right to decide who receives the payment.
Rev. Rul. 2012-18 contains an example illuminating the distinction: A restaurant has a policy of automatically adding an 18% gratuity charge to the bill of parties of six or more. Based on the above factors, this gratuity is a service charge. If the customers were allowed to add what they feel is an appropriate payment for service to the total of the bill, and the actual tip line on the bill is left blank, any additional amount the customers leave would be considered a tip based on the above factors.
For payments deemed calendar month tips, Section 6053(a) of the Internal Revenue Code requires every employee to report all those tips in one or more written statements furnished to the employer on or before the 10th day of the following month. The employee is to furnish the statements in the form and manner prescribed by the Service. See § 31.6053-1(b) of the Employment Tax Regulations.
The Las Vegas law office of Lagomarsino Law did not represent anyone involved in any cases that may be referenced above. This commentary is for educational purposes. If you would like to be represented by an attorney in our Las Vegas office, contact our office for a free confidential case review and receive a response within 24 hours. Call Toll Free 866-414-0400.