Rev. Rul. 58-168

Advice has been requested whether tips or gratuities accounted for by an employee to the employer for purposes of determining the employee's compensation under a state minimum wage act constitute `wages' for Federal employment tax purposes.

The minimum wage act of the state here involved provides, among other things, that, in the case of industries where gratuities have customarily and usually constituted and have been recognized as a part of an employee's wages for hiring purposes, an employer may count such gratuities as cash wages in an amount not to exceed a stated sum per hour as a part of the required minimum hourly wages, provided he submits substantial evidence that the employee has actually received such amount. Gratuities are defined as voluntary monetary contributions received by the employee from a guest, patron, or customer for services rendered.

Under the Federal 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 no constitute wages within the meaning of such regulations. See Rev. Rul. 57-71, C.B. 1957-1, 277. See also in this connection Rev. Rul. 57-397, C.B. 1957-2, 922, with respect to the status of so-called service charges made by an employer and subsequently disbursed to employees.

Under the provisions of the state minimum wage law referred to herein, a qualified employer may be granted an allowance in an amount not to exceed a stated sum per hour, on account of gratuities received by an employee from a guest, patron or customer, against the minimum cash wages required to be paid to the employee under that law, if the employer furnishes substantial evidence that gratuities to the extent of such claimed allowance have actually been received by the employee.

In order for the employer to obtain an allowance for gratuities in computing an employee's compensation under the foregoing provisions of law, he must of necessity require an accounting for gratuities from the employee. This situation fixes a definite relationship between the gratuities received by the employee and the compensation to be paid by the employer to the employee. Therefore, it is concluded that the amount of tips or gratuities claimed as a part of an employee's compensation under the state minimum wage law, constitutes additional `wages' as that term is defined in the Federal employment tax statutes.

Accordingly, it is held that the amount which the employer pays to an employee in cash and the amount of tips or gratuities accounted for by the employee in determining the employee's required compensation under the state minimum wage law must be taken into consideration, when computing the employee's `wages' for purposes of 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).

Compare S.S.T. 301, C.B. 1938-1, 455, which holds, in part, that the furnishing by an employee to an 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 does not constitute an `accounting' as contemplated by Article 15(c) of Regulations 90 and S.S.T. 12, C.B. XV-2, 417 (1936).