Rev. Rul. 76-231

The Internal Revenue Service has been requested to clarify the reporting requirements for both the employer and employee under Rev. Rul. 75-400, 1975-2 C.B. 464, which deals with the reporting of tips added to a waiter's check by a charge customer and paid over to the waiter by his employer.

A restaurant employing several waiters honors major credit cards as payment for meals and services. Tips may either be paid in cash directly to the waiter or added to the charge ticket. The employer pays over the amount of the tips shown on the charge ticket to the waiter who served the customer. The waiters participate in an arrangement whereby tips received are split with the bartender, buspersons and other support personnel.

Section 6041 of the Internal Revenue Code of 1954 provides, in part, that persons engaged in a trade or business and making payment in the course of such trade or business to another person, of salaries, wages, compensations, remunerations, or other fixed or determinable income of $600 or more in any taxable year, shall file a return under such regulations and in such form and manner and to such extent as prescribed by the Secretary or the Secretary's delegate.

Section 1.6041-2(a)(1) of the Income Tax Regulations provides that, in addition to wages subject to income tax withholding, all other payments of compensation to an employee by the employer in the course of the trade or business of the employer must be reported on Form W-2 if the total of such payments and the amount of the employee's wages, if any, required to be reported on Form W-2 aggregates $600 or more in a calendar year. An example given therein states that if a payment of $700 was made to an employee and $400 thereof represents wages subject to withholding under section 3402 of the Code and the remaining $300 represents compensation not subject to withholding, such wages and compensation must both be reported on Form W-2.

Section 6051(a) of the Code provides in the case of tips received by an employee in the course of employment, that the amounts required to be shown on Form W-2, Wage and Tax Statement, as wages subject to income tax withholding and Federal Insurance Contributions Act (FICA) withholding, shall include only tips that are included in statements furnished to the employer pursuant to section 6053(a).

Pursuant to section 6053(a) of the Code, every employee who, in the course of employment, receives in any calendar month tips that are wages as defined in section 3121(a) or 3401(a) (that is, $20 or more received directly or indirectly from customers) shall report such tips in one or more written statements to the employer on or before the 10th day of the following month. Sections 31.3121(q)-1 and 31.3401(f)-1 of the Employment Tax Regulations provide that tips that are reported by an employee to the employer in a written statement furnished to the employer pursuant to section 6053(a) of the Code, shall be deemed to be paid to the employee at the time the written statement is furnished to the employer. These sections also provide that tips received by an employee that are not reported to the employer in a written statement furnished pursuant to section 6053(a) shall be deemed to be paid to the employee at the time the tips are actually received by the employee.

Section 451(a) of the Code provides, in part, that the amount of any item of gross income shall be included in gross income for the taxable year in which received by the taxpayer. However, section 451(c) provides that tips included in a written statement furnished an employer by an employee pursuant to section 6053(a) shall be deemed to be received at the time the written statement including such tips is furnished to the employer.

Rev. Rul. 75-400, which amplifies Situation 2 in Rev. Rul. 69-28, 1969-1 C.B. 270, sets out the method by which employees are to report to their employer tips written by customers on waiters' checks and paid over to them by their employer. Rev. Rul. 75-400 provides that employees are required, under section 6053(a) of the Code, to report to their employer the total amount of tips received, that is, the total of tips paid by the employer to the employee for charge customers and tips received by the employee directly from the customer. Employees should report such tip income on Form 4070 or such form as is provided by the employer.

Although not specifically stated in either Rev. Rul. 69-28 or Rev. Rul. 75-400, employees who participate in a tip splitting or pooling arrangement are required to report to their employer on Form 4070 only tips they received and retained, whether received directly from their employer or customer, or indirectly as a result of such tip splitting or pooling arrangement.

Rev. Rul. 75-400 further sets out the employer's responsibility to report on Form W-2 tips that the employer paid over to the employee for charge customers, regardless of whether the employee reports such tips to the employer.

The addition of a tip on a charge ticket is a commonly accepted practice in certain businesses. A consequence of the business practice of accepting credit card payment is the employer's obligation to pay employees such charge tips. The employees' rights to receive such tips are provided for by the 1974 amendments to the Fair Labor Standards Act (29 U.S.C., section 203(m) (Supp. IV, 1974)). See S. Rep. No. 93-690, 93d Cong., 2d Sess. 42, 43 (1974) regarding the 1974 amendments. In fulfilling that obligation, the employer is "making payment in the course of such trade or business to another person, of . . . compensations . . ." within the meaning of section 6041 of the Code. Therefore, under section 6041 of the Code, section 1.6041-2(a)(1) of the regulations, and by analogy to the example in that section of the regulations discussed above (assuming the $600 aggregate test is met), the employer is required to report on Form W-2 with respect to all charge tips paid to the employee, although all or a portion of such tips may not have been reported to the employer on Form 4070 and are thus not subject to withholding. This charge tip reporting requirement involves no judgment on the part of the employer as to the includibility of such amounts in the recipient employee's gross income.

Accordingly, under section 6051 of the Code and the regulations thereunder, employers are required to report on Form W-2 under "Wages, tips and other compensation" (Box 2, 1976 Form W-2) the total amount of charge and cash tips reported by the waiter to the employer during the calendar year pursuant to section 6053(a), in addition to wages paid during that year by the employer. Employers are not required to report in Box 2, 1976 Form W-2, (or the appropriate box for subsequent years) or withhold tax on any tips not reported to them on Form 4070. However, under section 6041 and section 1.6041-2(a)(1) of the regulations, employers are also required to report on Form W-2 (Box 7, 1976 Form W-2, or the appropriate box for subsequent years) the amount of charge tips paid by the employer during the calendar year to the waiter to the extent that amount is in excess of the amount of charge tips reported by the waiter to the employer on Form 4070 with respect to that calendar year. The amount reported in Box 7 should be identified as "Unreported charge tips".

If, as a result of the above requirements, charge tips are reported by the employer in Box 7, 1976 Form W-2, or the appropriate box for subsequent years, and such charge tips are not included in gross income on the waiter's individual income tax return because of the waiter's participation in tip splitting or pooling arrangements, or any other valid reason, the waiter should attach a statement to the individual income tax return explaining why the gross income reported on that return does not include such charge tips.

The treatment of charge tips in this Revenue Ruling is illustrated by the following example:

Employee B files Form 4070 with Employer A on the 10th of each month following the month the tips were received. The pertinent facts are as follows:

 1. December 1975 charge tips reported

In Box 7 of the 1976 Form W-2, Employer A enters $2,100 that represents the excess of charge tips of $8,100 paid over to Employee B from January 1, 1976, through December 31, 1976, (Item 2, plus Item 4), over the $6,000 reported on Forms 4070 filed February 10, 1976, thru January 10, 1977, for each prior month (Item 3, plus Item 5).

Accordingly, there must be included on B's income tax return for 1976 the $2,100 shown in Box 7, except that B is not required to include any portion of such amount that was not included because of B's participation in a tip splitting or pooling arrangement, or any other valid reason. A written statement explaining B's participation in such an arrangement, or such other valid reason, must be attached to B's income tax return.

Pursuant to the authority contained in section 7805(b) of the Code, the provisions of this Revenue Ruling relating to charge tips that are not reported by the employee to the employer on Form 4070 or a substitute will be applied for calendar years beginning January 1, 1977. Thus, the Service will accept Forms W-2 for calendar years prior to 1977 that show only the amount of tips reported by the employee to the employer on Form 4070 or a substitute.

Rev. Rul. 75-400 is clarified and, as clarified, is superseded. Situation 2 in Rev. Rul. 69-28 is amplified.