Tips, Gratuities, and Service Charges (Publication 115)
Mandatory Charges

Mandatory tips, gratuities, and service charges

For transactions beginning on and after January 1, 2015, when a retailer’s records reflect amounts required to be reported to the IRS as nontip wages, the amounts are deemed to be mandatory and includable in taxable gross receipts.

When a retailer does not maintain records for purposes of reporting the amounts to the IRS, an amount negotiated between the retailer and the customer in advance of a meal, food, or drinks, or an event that includes a meal, food, or drinks is mandatory.

The amount will also be considered mandatory when the menus, brochures, advertisements, or other materials contain printed statements that notify customers that tips, gratuities, or service charges will, or may be added, to the bill. Examples of printed statements include:

• “An 18% gratuity [or service charge] will be added to parties of 8 or more.”
• “Suggested gratuity 15%,” itemized on the invoice or bill presented to your customer.
• “A 15% voluntary gratuity will be added for parties of 8 or more.”

When the menu, brochure, advertisement, or other material contains such printed statements, an amount automatically added to the bill or invoice is a mandatory charge and subject to tax. An amount is considered automatically added when the retailer adds the amount to the bill without first discussing it with the customer after the service of the meal.

It is presumed that an amount you add as a tip to the bill or invoice you present to the customer is mandatory. A statement on the bill or invoice that the amount is suggested, optional, or may be increased, decreased, or removed by your customer does not change the mandatory nature of the charge. This presumption may be disputed by documentary evidence maintained in your records showing that your customer specifically requested and authorized the gratuity be added to the bill.

Examples of documentary evidence that may be used to overcome the presumption include:

1. A guest check that is presented to the customer showing sales tax reimbursement and the figure upon which it was computed, without “tip” or with the “tip” area blank and a separate document, such as a credit card receipt, to which the retailer adds or prints the requested amount.
2. Guest receipts and payments showing that the percentage of amounts paid by large parties varies from the percentage stated on the menu, brochure, advertisement, or other printed materials.
3. A retailer's written policy stating that its employees shall receive confirmation from a customer before adding an amount together with additional verifiable evidence that the policy has been enforced. The policy is not in itself sufficient documentation to establish that the customer requested and authorized that the amount be added to the bill without such additional verifiable evidence.

Please retain the guest checks and any additional separate documents to show that the payments of tips, gratuities, or service charges are optional. You are also required to maintain other records in accordance with the requirements of Regulation 1698, Records.

No employer shall collect, take, or receive any gratuity or a part of that gratuity, paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of such gratuity, or require an employee to credit the amount, or any part thereof, of such gratuity against and as a part of the wages due the employee from the employer, as provided in Labor Code section 351. If this prohibition is violated, any amount received by the employer will be considered a part of the gross receipts of the employer and subject to the tax.