Tips, Gratuities, and Service Charges (Publication 115)

Businesses such as restaurants, hotels, caterers, boarding houses, drive-ins and similar establishments often receive payments designated as tips, gratuities, and service charges from their customers. An optional payment designated as a tip, gratuity, or service charge is not subject to tax. A mandatory payment designated as a tip, gratuity, or service charge is included in taxable gross receipts, even if the amount is later paid by the retailer to employees.

Optional tips, gratuities, and service charges

Generally, a tip, gratuity, or service charge (tip) is optional if your customer adds the amount to the bill, or leaves a separate amount in addition to the actual amount due from your sale of meals, food, and drinks that include services.

A tip, gratuity, or service charge is optional and not included in taxable gross receipts when:

1. The restaurant check is presented with the “tip” area blank so your customer may voluntarily write in an amount, or
2. The restaurant check is presented to your customer with tip suggestions and the “tip” area is blank so your customers may voluntarily write in an amount if they wish to do so.

basic rules in applying district tax to sales of merchandise delivered in California

Guest Check
Food Item A	$9.95
Beverage Item B	3.75
Subtotal	$13.70
8.25% sales tax	1.13
Subtotal	$14.83
Tip*	______
Total	______
*Suggested tips: 15%=$2.06; 18%=$2.47; 20%=$2.74; other.

Please note: The tax rate of 8.25 percent is used for illustrative purposes only; your actual rate may differ. To find the correct tax rate for your area or business location, visit www.cdtfa.ca.gov and click Find my tax rate.

On and after January 1, 2015, when a retailer keeps records consistent with reporting amounts as tip wages for Internal Revenue Service (IRS) purposes, such amounts are presumed to be optional and not subject to tax. When a retailer does not maintain such records, this presumption does not apply and the amounts may be mandatory and included in taxable gross receipts.

If an employer misappropriates gratuities that are intended for an employee, these amounts are included in the retailer's taxable gross receipts.