Rev. Rul. 69-28

The purpose of this Revenue Ruling is to update and restate the positions set forth in S.S.T. 145, C.B. 1937-1, 443, and S.S.T. 301, C.B. 1938-1, 455, insofar as they are applicable under the current statute and regulations.

The questions presented are whether amounts received by employees under the situations described below are "wages" for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Sources on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954).

Under the portion of the Employment Tax Regulations relating to the Federal Unemployment Tax Act, the term "wages" means all remuneration for employment, with certain exceptions of which only one is here material. Section 31.3306(b)-1(j)(3) of the regulations provides for the exclusion from "wages" of "tips or gratuities paid directly to an employee by a customer of an employer, and not accounted for by the employee to the employer." Amendments to chapters 21 and 24 of the Code made by section 313 of the Social Security Amendments of 1965, Public Law 89-97, C.B. 1965-2, 601, govern the status of tips received after 1965 for purposes of the Federal Insurance Contributions Act and the Collection of Income Tax at Sources on Wages. Pursuant to these amendments, an employee who receives cash tips amounting to $20 or more in any calendar month after 1965, in the course of his employment by an employer, must report the tips to the employer by furnishing one or more written statements not later than the 10th day of the month following the month of receipt. The employer must withhold the employee taxes under the Federal Insurance Contributions Act and the Federal income tax on the reported tips from wages of the employee (other than tips) under the employer's control or from other funds made available by the employee for this purpose. (See sections 3102(c), 3402(k), and 6053(a) of the Code.)

Situation 1. A club does not permit the tipping of its employees in cash but in lieu thereof adds 10 percent to the amount of the cafe charges made to the accounts of club members. The added amounts are set aside in a fund, which is divided and disbursed monthly to the club's waiters. It is stated by the club that the amount the waiters receive through this plan does not affect the regular wages paid to them.

In this situation the 10 percent added to the cafe charge is an arbitrary charge fixed by the club that the member is required to pay and is clearly not a gratuity. Moreover, the added charge is not paid by the customer directly to the employee but is paid to the club and becomes a part of the club's funds. In other words, the transaction with respect to the 10 percent added charge is between the customer and the club and not between the customer and the employee of the club. The employee does not share in the fund on account of services rendered individually to any one customer. Under the circumstances, when the fund made up from the 10 percent added charges is divided and disbursed to the waiters by the club it is disbursed to them as employees of the club in consideration for services rendered to the club as the waiters' employer. The sums so disbursed are "wages" paid by the club to its employees, for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages. See Rev. Rul. 66-74, C.B. 1966-1, 229.

Situation 2. A customer of a hotel does not give the waiter a tip directly but writes the amount thereof on the waiter's check. The hotel pays the tip to the waiter and charges it to the account of the customer. The amount of the tip has no bearing on the remuneration paid by the hotel to the employee.

In this situation, as distinguished from Situation 1 above, the amount of the tip is fixed by the customer and is paid by him for services rendered to him by the employee. Although, under the circumstances, the amount of the tip may be brought to the attention of the employer, there is no accounting by the employee and the amount is not "wages" for purposes of the Federal Unemployment Tax Act. If the cash tip received by the employee amounts to $20 or more, or, together with other cash tips received by the employee in the course of his employment by the employer in the calendar month, amounts to $20 or more, the amount of the tip or tips is "wages" under sections 3121(a)(12)(B) and 3401(a)(16)(B) of the Code and must be reported by the employee to the employer pursuant to section 6053(a) of the Code.

Situation 3. A customer arranges with a hotel for a banquet and makes a lump-sum payment for tips to the head waiter in charge of the banquet with instructions to distribute the amount among the employees serving the banquet, leaving the amount that each employee shall receive solely to the discretion of the head waiter. The employer has no knowledge of the amount of the tips and the amount thereof is not taken into consideration in determining the remuneration of the employee.

In this situation the lump-sum payment for tips to the head waiter is not "wages" for purposes of the Federal Unemployment Tax Act. The lump-sum payment received by the head waiter and distributed to employees, including himself, is "wages" for Federal Insurance Contributions Act and income tax withholding purposes if the requirements of sections 3121(a)(12)(B) and 3401(a)(16)(B) are met, as stated in Situation 2.

Situation 4. A restaurant guaranteed its waiters a fixed income consisting partly of remuneration paid by the restaurant and partly of tips.

For purposes of section 31.3306(b)-1(j)(3) of the regulations under the Federal Unemployment Tax Act, the amount of tips received can be established only on the basis of the employee's written reports to the employer. (Rev. Rul. 66-369, C.B. 1966-2, 451, 453.) Whether the tips received are "wages" for Federal Insurance Contributions Act and income tax withholding purposes is determined by sections 3121(a)(12)(B) and 3401(a)(16)(B), as stated in Situation 2.

Situation 5. An employee furnishes his employer a written statement showing the amount of his tips for the purpose of enabling his employer to include the tips in his reports under a State unemployment compensation act. Are the tips considered to be "accounted for by the employee to the employer," as contemplated by the regulations under the Federal Unemployment Tax Act?

In this situation the furnishing by the employee to his employer of a written statement of the amount of his tips merely for the purpose of enabling the employer to comply with the requirements of a State unemployment compensation act is not an "accounting" as is contemplated by the regulations under the Federal Unemployment Tax Act. However, compare Revenue Ruling 66-369, C.B. 1966-2, 451, which provides an example of an "accounting" for purposes of the Federal Unemployment Tax Act where the tips are (1) reported in writing by the employee to the employer, and (2) are taken into account by the employer, to the extent permitted in determining the employee's compensation under the State minimum wage law. In Revenue Ruling 66-369 the requirements of the minimum wage law of the State are such that compliance therewith fixes a definite relationship between the tips received by the employee and the compensation to be paid by the employer to the employee and, thereby, meets the requirement of section 31.3306(b)-1(j)(3) of the regulations that the tips bear a relationship to the total amount of the employee's remuneration.

S.S.T. 145 and S.S.T. 301 are superseded, since the positions set forth therein are restated under current law in this Revenue Ruling.