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How to differentiate between tips and service charges

On Behalf of | Jun 16, 2020 | blog, Employment Law for Employers |

If an employee in New York or elsewhere regularly receives more than $30 a month in tip income, that person is considered to be a tipped employee. Employees who receive cash tips of more than $20 in a month must report those earnings to their employers. This income is subject to FICA and income taxes, and if a worker makes more than $200,000 in a year, that person may be subject to an additional Medicare tax of .9%.

There are four conditions that must be met for a payment to an employee to be considered a tip. First, the amount of the payment must be determined solely by the customer. Second, the customer must be given the right to determine who receives the money that he or she has provided. Furthermore, the customer must be allowed to determine the amount of the tip given to that individual.

Finally, the employer is not allowed to play any role in deciding how large a tip should be or who receives it. If an employer adds a gratuity to a check, it is considered a service charge because the gratuity is a mandatory payment. Fees charged for bottle service at a club or for room service at a hotel are also generally considered to be service charges instead of tips.

Business owners who have questions about how to handle employee tips may want to consult with a professional who understands employment law for employers. This may make it easier for a company to determine if an employee received a tip and how to include that money on a tax form. Properly accounting for tip income might reduce the possibility that a company receives a tax audit and reduce the chances that an employee is audited by the government.