Change in Tip Reporting is Coming Mandatory gratuities (tips) to become service charges

The long-standing practice of automatically charging you a 15 – 20% gratuity at your favorite restaurant is changing as we speak. The practice of charging customers for tips is normally applied to large parties (tables of 8 or more) or at high profile restaurants. The practice came about to ensure servers handling large groups receive adequate tips. Here is what is changing:

Restaurant Owners

Beginning in 2014 any automatic gratuity added to a patron’s bill is deemed to be service income and treated as wages to employees. This change will mean lower take home pay for servers and it will mean larger social security payments for restaurants as the normal social security tip credit will not apply to these fees. To avoid tips being reclassified as wages a tip must;

  • be at the discretion of the customer
  • the amount must be determined by the customer
  • the beneficiary of the tip is generally to be determined by the customer
  • the amount is not subject to negotiation or policy

How this is interpreted by restaurants will continue to evolve.


This automatic gratuity should not be reported by you as tip income when you report your tips to your employer beginning in January, 2014. It should already be included in your wages. If your employer currently has the practice of adding automatic tips to customers’ bills, you may wish to let them know of this impending change.


A number of larger restaurants are temporarily doing away with automatically charging you a tip amount on your bill. This is being done as a test to see if customers continue to add a reasonable tip amount when your dining party is large. Decisions will then be made whether to continue to add this automatic tip charge, or allow patrons to determine an appropriate tip.

While this change takes place over the next few months, remember if service is poor, the gratuity can be negotiable even if it is automatically applied to your bill.

I’m Being Audited!

Less than 2% of over 145 million individual tax returns filed during 2012 will be selected for audit. The percentage increases for higher income groups and tax returns in areas of specific interest to the IRS. If you should receive notice from the IRS of an impending audit please remember:

  • IRS computers usually flag the tax returns for audits. The vast majority of them are routine.
  • Because of the flagging process, your audit will usually focus on one to three categories of your tax return.
  • Audits do not automatically mean something is wrong. It is possible to receive a “no change” or even an additional refund as an outcome of an audit.

What to do if you are audited.

  • Don’t panic. Open all correspondence and make sure you respond to all requested information in a timely fashion.
  • Keep good records. Be prepared to support your tax return details. Do this as you prepare your tax records each year. This is the one most important things you can do.
  • Ask for help. You are not a tax professional, the IRS auditor is. So get help and do so as soon as possible after receiving your notice. Let professionals deal with the IRS as much as possible.
  • The best defense is a good offense. Identify the information in question and prepare as much as possible to defend your tax return prior to any meetings with auditors.
  • Answer questions, do not volunteer information. Answer only the questions under review. It helps both you and the often over-worked auditor. Avoid attending meetings with an auditor on your own.
  • Do not make it personal. Remember to be polite and avoid making editorial comments about anything other than what is being asked.

If you feel you are being treated unfairly remember there are numerous means within the system to help you, from talking to a supervisor to using the IRS taxpayer advocate service.

Reduce Your Income: Hire Your Kids

If you own your own business, by hiring your children you can save in the following ways:

  • Salaries paid to children under 18 are not subject to Social Security or unemployment taxes (in most states).
  • No Federal withholding taxes are required if the child is under age 21 and earns under $5,950 per year.
  • Even if the child must pay taxes, the child’s rate of tax is normally lower than your own rate.
  • You should not have to pay worker’s compensation for the child as you would on a non-family member.

Set it up correctly

To ensure your child’s income is not challenged here are some suggestions:

  • Provide a job that your child can reasonably handle. Ideas include; filling the company vending machine, copying, clean up, mailing, help with advertising, light packaging, light typing and customer service.
  • Pay your child at least minimum wage and a wage rate that is comparable to what you would pay someone else to do the work.
  • Make payments periodic (at least once per month).
  • Include a W-2 at year-end.
  • Keep the same payroll records as you do for other employees.

Other things to note

  • Hiring your children to work for you does not apply if your business is a C-Corporation.
  • This benefit works best if your business is unincorporated (sole-proprietor).
  • Do not have children conduct dangerous or heavy industrial work as this could come under review by the Department of Labor.
  • Treat your child like other employees. This includes time-cards and training.

Besides the tax benefits, hiring your children can gain them valuable experience and help them understand what you do every day.

Couples Deemed Married for Federal Tax Purposes

Recent U.S. Dept. of Treasury and IRS Ruling

The U.S. Treasury Department and the IRS issued a new ruling as a direct result of the Supreme Court action on June 26th regarding same-sex couples. In short:

Under the ruling any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, or a U.S. territory that recognize same-sex marriage will be treated as married for all federal tax purposes. This includes:

  • filing status
  • personal deductions
  • dependency exemptions
  • standard deductions
  • employee benefits
  • tax credits
  • retirement plans and contributions

More importantly, this ruling applies regardless of where the same-sex couple currently lives. The ruling applies to originally being married in jurisdictions that legally recognize their marriages.

Other things to note:

  • Beginning in 2013, same-sex couples within this ruling must file either married filing jointly or married filing separately. You may no longer file as a single taxpayer.
  • You may choose to, but are not required to, file amended tax returns as being married for any prior tax years that are still open under the statute of limitations. This usually means three tax years (2010, 2011, and 2012).
  • This ruling DOES NOT apply to registered domestic partnerships, civil unions or similar formal relationships.
  • If you paid for same-sex health insurance coverage from an employer in after-tax dollars you may be able to shift these premiums into pre-tax dollars.
  • State laws are more complex and are currently evolving so try to keep informed of any new developments on this front.

More information will be forthcoming on this subject from the IRS and other government agencies.