A tip credit is available to an employer who hires employees who normally receive tips while performing their job duties. The tip credit reduces the employer's liability for Medicare and Social Security payments. In many businesses, such as food service, the hotel professions and valet parking, the Internal Revenue Service assumes that employees receive tips and taxes them accordingly. The IRS regulation that allows an employer to gain a tip credit is Section 45B.
The tip credit applies to delivery employees as well as employees that work at the employer's place of business. The consumer does not have to eat or drink the food at the employer's store for the employer to qualify for a tip credit, so this also applies to takeout. Pizza and other food delivery drivers often receive tips from their delivery customers.
A tip credit only applies for employees who normally receive tips from customers. Sometimes, the wait service staff shares tips with employees who are not in contact with the patrons, such as the chef or the dishwasher. The state of Utah does not allow the employer to receive a tip credit for these employees, and also forbids an employer from forcing the wait service staff to share tips with these workers in a tip pool. The employer can force the wait service staff to share tips with other service workers such as busboys and hosts, since these workers are in contact with the customer, and the employer can claim a tip credit for them also.
A temporary agency may assign a wait service professional, a hotel worker or another employee to a job assignment that provides tips to the employee. When the employee works for the temporary agency and is not the direct employee of the hotel or the restaurant owner, a court may assign an examiner to determine whether the temporary agency or the business that the temporary employer works at can claim the tip credit, according to the Internal Revenue Service.
The tip credit only applies to voluntary tips that an employee receives from a customer. Some restaurants add a mandatory gratuity charge to a bill, especially if a large party visits the restaurant, since this places an extra burden on the restaurant. The customer owes this money directly to the restaurant, according to the state of California, so it is not considered a tip.
The employee does not have to report the tip income to the employer for the employer to be eligible for a tip credit. The Internal Revenue Service estimates the amount of tips that an employee receives, and the employer can use an estimate when requesting the tip credit. The Internal Revenue Service will use the estimated tips it believes an employee receives when calculating the employee's taxable income.
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