Publication 115, Tips, Gratuities, and Service Charges
- Optional Charges
- Mandatory Charges
- Service Charges
- Additional Information
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.
Voluntary tips, gratuities, and service charges
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:
- The restaurant check is presented with the “tip” area blank so your customer may voluntarily write in an amount, or
- 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.
|Food Item A||$9.95|
|Beverage Item B||3.75|
|8.25% sales tax||1.13|
|*Suggested tips: 15%=$2.06; 18%=$2.47; 20%=$2.74; other.|
However, any amount of such gratuities withheld or retained by an employer will be considered a part of the gross receipts of the retailer and subject to tax.
Note:This publication summarizes the law and applicable regulations in effect when the publication was written, as noted above. However, changes in the law or in regulations may have occurred since that time. If there is a conflict between the text in this publication and the law, decisions will be based on the law and not on this publication.
Mandatory tips, gratuities, and service charges
When you negotiate an amount of a tip, gratuity or service charge with your customer in advance of an event that includes serving a meal, food, or drinks, that amount is mandatory.
In some cases 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 you 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 and receiving approval to add the amount, or without providing the customer the option to write it in.
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.
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.
Unrelated service charges
Tax does not apply to separately stated charges for services unrelated to furnishing and serving meals, food, or drinks, such as optional entertainment or any staff who do not directly participate in the preparation, furnishing, or serving of the meals, food, or drinks. For example:
- Coat-check clerks
- Parking attendants
- Security guards
Pooled tips for taxable and nontaxable services
If your contract requires your customer to pay a lump–sum tip in addition to your other charges, tax applies to all charges directly related to the preparation and service of the meal. But if you divide the tip among employees who prepare and serve food and those who provide parking, the portion paid to the parking attendants is not taxable. Your invoice and business records must clearly document the specific percentage or amount paid to each type of employee and the service provided.
Optional service charges related to nontaxable sales may be segregated by:
- Listing the taxable charges separately on the invoice
- Separately stating the sales tax
- Keeping separate records of taxable and nontaxable charges
A cover charge is taxable if it allows your customer to consume food or beverages served on the premises without paying additional amounts for them. This is true even if the customer does not consume any food or beverages, or if the value of the food or beverages is less than the cover charge. Separate cover charges for admission only are not taxable.
Charges for opening and serving a customer–furnished beverage are generally taxable.
By law, restaurants in the City of San Francisco have the choice of either raising their prices or adding on a “Health Surcharge” cost to each meal check, to cover the owner’s portion of the health insurance that they provide to their employees. Despite the fact that this is a government mandate, it is interpreted by the Board of Equalization (BOE) as an increase in the price of the meal and therefore is subject to California sales tax.