What Is a Gratuity Tax?

At some establishments you may see a gratuity tax added to your bill on top of a gratuity or service charge, and it is completely legal and often required. A gratuity may become a taxable sale depending on how the restaurant handles gratuities and state sales tax law. In general, you only pay a gratuity tax when an establishment includes a gratuity as part of the bill.

A gratuity tax is a levy on a gratuity charge. For example, many businesses automatically charge a service fee of 18 percent of the meal's value. A gratuity tax would be sales tax on that gratuity. Many states charge a gratuity tax when a restaurant makes a gratuity mandatory rather than leaving it to the customer to decide whether to leave a tip and if so how much. A mandatory gratuity becomes part of the cost of the meal.

States usually have exceptions to a gratuity tax. For example, in New York a restaurant is not required to impose a tax on a gratuity if the establishment itemizes the gratuity separately from the rest of the bill and 100 percent of the gratuity goes to the employee. The restaurant may withhold some of the gratuity for taxes, but the employee must ultimately receive everything.

When a restaurant has to charge a gratuity tax, it charges the prevailing local and state rate. However, some owners simplify the calculation by expressing the gratuity tax as a percent of the entire bill. For example, if you had a mandatory gratuity of 20 percent on a $30 bill, you would be required to pay an additional $6. If the sales tax rate was 10 percent, you would pay a 60-cent tax on the gratuity — about 2 percent on the basic bill.

Before you order anything in a restaurant, you might ask if the meal includes a mandatory gratuity and gratuity tax. You may object to a gratuity tax when you think it is excessive, especially when the tax applies to drinks and alcohol purchases.

Normally, the Internal Revenue Service does not let you deduct sale taxes on your federal tax return, but it has allowed a sales tax deduction in some years, such as 2005 to 2009.