Regulations change for tipped employees

While the federal minimum tipped wage won't change soon, a new law regulating mandatory gratuities, also known as service charges, may influence how employers at service-related businesses set up their tip plans.

A 2012 ruling by the IRS decided that mandatory gratuities, commonly used for large parties at restaurants and in some other situations, are actually wages and therefore subject to the Federal Insurance Contributions Act tax, according to law firm Ford & Harrison LLP. Voluntary tips are exempt from FICA taxes and therefore preferable to both workers and businesses.

The U.S. Department of Labor had already ruled that service charges did not count as tips and should not be classified as such when given to employees. However, such monies can be used to meet the minimum wage obligation for employees, fulfilling the payment requirement based on time and attendance. Additionally, the DOL points out that mandatory tips aren't subject to the restrictions against tip pooling and tip sharing, meaning that this kind of charge can legally be shared with staff like chefs and dishwashers.

Maintaining proper pay schedules and records for tipped employees can be complicated, so businesses should use employee management software to properly track and sort worker wage information.


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