Ann. 2012-50
The (Rev. Rul. 2012-18) ruling was originally set to be effective for amounts paid on or after 1/1/2013. The IRS has now extended the effective date to amounts paid on or after 1/1/2014. This gives clients one more year to implement procedures to ensure proper reporting if they choose to continue paying service charges. The IRS has extended until on or after January 1, 2014 for taxpayers to comply with the proper treatment of service charges under Rev. Rul. 2012-18. Service charges include mandatory add-ons to food and beverage bills distributed to wait staff by the employer.

Rev. Rul. 2012-18 was effective immediately and applicable retroactively. Under limited circumstances with regard to amounts paid before January 1, 2013, that were improperly characterized as tips when they properly should have been characterized as service charges, the IRS instructed examiners in an interim guidance memorandum (IGM) to apply Q&A 1 of Rev. Rul. 2012-18 prospectively, that is, only to amounts paid on or after January 1, 2013 (SBSE-04-0612-057). The IRS explained that an updated IGM will alert examiners about the extension to January 1, 2014.

Background

Code Secs. 3101 and 3111 impose FICA taxes on employees and employers. Code Sec. 3121(q) provides that tips received by an employee during the course of his or her employment are remuneration and are deemed to be paid by the employer for purposes of the employer portion of FICA taxes. The remuneration is deemed to be paid when a written statement including the tip is provided by the employee to the employer. If the employee does not report the tips, they are deemed paid when the IRS makes notice and demand to the employer.

Rev. Rul. 2012-18

Rev. Rul. 2012-18 provided question-and-answer guidance for distinguishing between tips and service charges. In Q&A 1 of Rev. Rul. 2012-18 reaffirmed the factors used to determine whether payments constitute tips or service charges. Q&A 1 of Rev. Rul. 2012-18 provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge:
  • The payment must be made free from compulsion;
  • The customer must have the unrestricted right to determine the amount;
  • The payment should not be the subject of negotiation or dictated by employer policy; and,
  • Generally, the customer has the right to determine who receives the payment.

Extension

In Ann. 2012-25, the IRS asked taxpayers if additional time would be needed to ensure that systems would be compliant. After reviewing the comments received from taxpayers, the IRS recently decided that an extension to January 1, 2014 would be appropriate.

Author: Richard Wu