Many clubs permit tipping for servers providing food and beverage service. In the “restaurant” world, an employer must maintain some method of tip reporting. This means that the entity must have a system to capture the tips received by a server in cash or by credit card to properly detail the amounts for payroll reporting. In order to tax tips for social security and Medicare purposes, an incentive for reporting tips was adopted for the food and beverage industry: the FICA tip credit.
Most clubs use a point of sale system that records the sales and tracks the tips by server. This information can form the basis for the tip amount paid to the server, which must be separately indicated for the employee in the club’s payroll system. A different tip pay code is recorded on the quarterly payroll report line “Taxable social security tips,” on Form 941. The amount the club can use to claim the FICA tip credit is reported on this line. The club can claim the credit by filing Form 8846 with the club’s tax return. Credits offset tax dollar for dollar as opposed to deductions, which reduce the amount that is subject to a tax rate.
A social club exempt from income tax under Internal Revenue Code Section 501(c)(7) (“IRC”) is permitted to claim the tip credit on its unrelated business income tax return, Form 990-T. It is proper for a tax-exempt social club to claim the credit for the portion of employer social security taxes paid with respect to employee tips received from both members and nonmembers (IRS Revenue Ruling 2003-64).
So what is a tip? Some clubs “suggest” a tip amount on all point of sale tickets. If a member believes that the service was inadequate this amount would be removed from their ticket. Some clubs provide a line on the POS ticket to add additional amounts to the suggested tip for excellent service. And, some clubs do not pay the amount titled “service charge” to the servers. According to the IRS, to constitute a “tip” the following is required:
a. It must be presented by the customer free from compulsion;
b. The patron must have the unrestricted right to determine the amount thereof; and,
c. The amount should not be the subject of negotiation or dictated by employer policy.
Generally, the customer has the right to determine precisely who shall be the recipient of his generosity. If these factors are lacking, the IRS takes the position that the amount is a service charge not eligible for the tip credit and considered wages for employment tax purposes. The definition of wages for workers’ compensation purposes exempt tips in many states. It is considered a tip if the amount is billed to the account of a member (customer), but paid to the employee directly by the club.
If your club provides private dining rooms and/or ballrooms known as banquet facilities and charges a certain amount added to the function for distribution to the banquet waiters, it is considered compulsory by the IRS. Amounts paid by compulsion by customers (members) are not considered tips. These amounts—even if distributed to the wait staff—are considered wages subject to all employer-related taxes and, generally, workers’ compensation.
A private club should evaluate its tipping policy and inform the preparer of the club’s income tax returns about the compensation method for the serving staff in order to determine their eligibility to claim the tip credit
Gail Egan, CPA, Esq., is a partner with the firm Egan & Egan, CPA’s, a full service public accounting firm providing attest and taxation services specializing in service to private clubs and hospitality.