Employee Tips: How the IRS Views Customer Gratuities

There has always been a level of confusion when it comes to employee tips/wages and the Internal Revenue Service. With the laws constantly changing, establishments must familiarize themselves with what is reportable as a tip and what is considered an employee wage. Not understanding these rules can lead to costly fines and penalties-and possibly a business shutdown in the event the business failed to recognize the potential tax implications.

Employee Tips versus Wages: What’s the Difference?
According to the IRS, tips are any additional gratuities paid to employees outside of their regular wages, while wages are a fixed hourly rate or salary amount that is paid on the company’s said pay dates as part of the employee’s gross income. The IRS considers wages taxable income, and employees who receive wages are required to pay income tax on it each year.


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