A gratuity is either an extra charge that a restaurant adds to a bill – usually for serving a large party – or an optional payment that a customer makes that is similar to a tip. Most states do not charge sales taxes on voluntary gratuities. States charge a sales tax on a mandatory gratuity under certain conditions. A service charge is another term for a gratuity.
Read More: What is a Gratuity Tax?
Rules Based on Gratuity Size
The size of the gratuity affects sales taxes. Some states, such as Texas, do not require a sales tax when the gratuity is less than 20 percent of the bill for the meal, not including tips and the standard sales tax. If the restaurant charges a 25 percent gratuity, the restaurant pays taxes on the additional 5 percent charge.
Listing the Gratuity
Some restaurants list the gratuity charge on the customer's bill, while others include it in the cost of each menu item. States usually charge a sales tax if the restaurant adds the gratuity to the cost of food or beverages without notifying the customer about the extra cost on the bill. If the gratuity appears as a separate entry, such as an 18 percent charge after the list of the price of each menu item, it is exempt from sales tax in some states.
The reason this matters is because some states will view gratuities that are listed separately as taxable or nontaxable income. When listed separately, the gratuity is often not taxable. This applies to delivery fees as well. In some cases, when you order from a restaurant and they use a delivery service, you will not be taxed on the delivery charge.
In Wisconsin, for example, if the gratuity is set to a certain amount and automatically added to the bill, it is considered taxable. For instance, if they mark every bill at a restaurant with 15 percent gratuity charge, then that total bill, including the 15 percent, will be taxed.
Tips for Direct Service Workers
The gratuity exemption depends on which workers benefit from the tip. A voluntary tip that the waiter or bartender receives from the customer is exempt from sales taxes.
If the restaurant charges a gratuity, but then distributes it to hosts, servers and other employees who are in contact with the customer, it is usually not taxable. If the restaurant charges a gratuity and uses it to pay the wages of employees who do not directly serve the customer, such as the dishwasher or the manager, it is usually subject to sales tax.
Taxes on an Optional Gratuity
The sales tax on a gratuity may depend on whether the customer has the option to decline this payment. In the state of Idaho, if a restaurant charges an optional gratuity, but does not tell the customer that this gratuity is an optional suggestion, the gratuity is taxable. If the customer agrees to pay a gratuity before hosting an event, such as a wedding or a business conference, the gratuity is considered to be part of the bill for the event and is subject to sales tax.
Eric Novinson has written articles on Daily Kos, his own blog and various other websites since 2006. He holds a Bachelor of Science in business administration from Humboldt State University.