Rev. Rul. 57-397

Advice has been requested with respect to the treatment, for Federal employment tax purposes, of amounts collected by a hotel under the circumstances set forth below and disbursed to its waiters and other employees.

The instant hotel has entered into a contract with a labor union which represents the waiters employed by the hotel in connection with the operation of its dining room and other dining facilities. This contract, in addition to establishing the basic wage scale, provides for the distribution of a service charge to the head waiter, captains, and other waiters and employees. The service charge, which the customer is required to pay when utilizing the dining facilities of the hotel, is usually ten or fifteen percent of his bill and is in lieu of direct tips or gratuities. The amounts collected by the hotel as a service charge are disbursed monthly by the hotel to its waiters and other employees.

Under the Employment Tax Regulations, the term `wages' means all remuneration for employment with certain exceptions and/or limitations not here material. Tips or gratuities paid directly to an employee by a customer of an employer, and not accounted for by the employee to the employer, do not constitute wages within the meaning of such regulations. See Rev. Rul. 57-71, C.B. 1957-1, 277.

In S.S.T 145, C.B. 1937-1, 443, it is held that where a club does not permit the tipping of employees but in lieu thereof adds ten percent to the cafe charges made against its members' account and disburses the added amounts monthly to the club's waiters, the sums so disbursed constitute wages within the meaning of sections 811(a) and 907(b) of Titles VIII and IX, respectively, of the Social Security Act. In S.S.T. 301, C.B. 1938-1, 455, it is held, in part, that if a customer of a hotel, instead of directly giving the waiter a tip, writes the amount thereof on the waiter's check and the hotel pays the tip to the waiter and charges it to the account of the customer, such amount having no bearing on the amount of the compensation paid by the employer, the amount of the tip does not constitute `wages' under Titles VIII and IX of the Social Security Act. The conclusions reached in S.S.T. 145 and S.S.T. 301, supra , are likewise applicable under the Federal Insurance Contributions Act, the Federal Unemployment Tax Act and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954).

In distinguishing the two rulings, it is to be noted that in S.S.T. 145 the ten percent added to the cafe charge is an arbitrary charge fixed by the club which the member is required to pay and is clearly not a tip or gratuity; whereas in S.S.T. 301 the amount of the tip is fixed by the customer and is paid by him for services rendered to him by the employee, and even though the amount of the tip is brought to the attention of the employer there is no accounting to the employer by the employee within the meaning of the regulations.

It is the position of the Internal Revenue Service that where, as in the instant case, the amount added to the bill for disbursement to the waiters and other employees is a sevice charge established pursuant to hotel policy or pursuant to the provisions of a contract between the hotel and the union, which the customer is required to pay when utilizing the dining facilities of the hotel, such amount is clearly not a tip or gratuity since the customer has no choice in the matter. Under such circumstances, S.S.T. 145 is applicable and the amounts disbursed to the employees in the instant case constitute wages for Federal employment tax purposes, and for income-tax withholding. See S.S.T. 145, supra . It is immaterial whether the hotel also permits direct tipping or whether the service charge is disbursed immediately or at daily or weekly intervals to the waiters and other employees.