What is the difference between a "gratuity" and a "tip"? Aren’t they both the same?

Although these words appear interchangeable, they are not. A gratuity is an amount charged to a customer automatically by an establishment, usually a set percentage. This amount is considered a wage by the Internal Revenue Service and must be handled as such on the payroll. It is not considered a tip since it is involuntary. This is true even if paid in full to staff.

A tip is a voluntary amount paid by a customer directly to wait staff. It is the responsibility of the tipped employee to report the amounts received from the customer to the employer for employee and employer tax reporting.

Although these are handled differently on the payroll, both the tip and the gratuity can be used to cover the minimum wage requirements. It is important to note that gratuities do not qualify for the employer tip credit.

The information given is provided for general, non-specific educational purposes only, and should not be relied upon as advice relating to your specific circumstances. For company-specific advice, consult directly with your tax advisor.

James Conniff is the Managing Partner at Bacall & Conniff, P.C., a full service CPA firm that provides industry specific accounting solutions for restaurateurs. Their services include: Weekly flash reports, Monthly financial statements, Web-accounting, Optional bookkeeping & payroll services, and Comprehensive tax & advisory services. They can be reached at 617-367-3250.

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