What You Need to Know About Services Charges vs Tips

On January 1, 2014, the IRS enforced Revenue Ruling 2012-18 which defined tips vs service charges (aka Autograt) and clarified the tax implications of each. Almost 5 years later, it seems there is still some confusion among restaurant owners, employees, and customers. Service charges are usually implemented to ensure the certainty of tips for tipped employees working events or serving large groups. Although, restaurants are slowly evolving towards a tip free model entirely (a hot topic for another day). The distinction between tips and services charges is important because it has legal implications and materially affects tax reporting for the employer and employee. Here, we’ll let you in on what you need to know about service charges vs tips.