I just got a bid from a caterer for a backyard party. The bill was itemized, then subtotaled, then the tip (service charge) was calculated and subtotaled, then a tax was calculated on that subtotal.
Is it legit to charge tax on the tip?
It seems to me that when they bring the bill at restaurants, they add in the tax and then I add the tip. The tip is not taxed.
Am I mistaken? Do I have a right to challenge the tax on the (automatic) tip?
This is unexpected. However, in states that tax services, this appears to be a normal activity. Otherwise the reported tips income tax would come out of the caterer's pocket. This is for reported income.
This is in California. Should have mentioned that.
In most states that tax catering the tax is on any included gratuity (ie: computed into the bill) but not on any additional gratuity.
Although you might think the bulk of what you are paying for is the service (generally not taxed) of the catering company and therefore the sales tax should only be on the food, it just doesn't work like that with most businesses. When a goods / service - like catering - involves both goods and services, the sales tax is on the total bill (goods and services combined).
In a restaurant, when a gratuity is added, it is not taxable because it generally goes wholly to the serving staff. This makes it a true gratuity and nontaxable.
In a catering situation, the amount added on does not wholly go to the serving staff. Some may be retained to offset kitchen labor costs. Some is given to managers. This makes the original amount a service charge not a gratuity and therefore it is a sales taxable.
30 plus years in hotel/restaurant accounting.Startin 1982 when congress enacted TEFRA, all credit cards tips are now reported automatically. Employee has no option. I remember a senior waiter in the fining dining room of the hotel were I was came to me with his 1982 W2. He said you have made a mistake.. you show I made $35,000 this year. Here is a copy of my 1981 W4.. I had $8000. He had not been paying attention to the memos posted all over the hotel.. near time clocks, in work areas, etc. A lot of career wait people will declare their tips because they are hampered when they try to buy a really nice car or house because their tax returns didn't show enough earnings. Three of those 30 years were in topless entertainment clubs.. very high end.
Cash tips are they only ones that are not provable by the government. The IRS expects to have at least 8% of their individual to be reported as tips received. If credit card tips meet or exceed that, and no cash tips are declared, then no flags are set.
If the difference in reported tips (including credit card tips) and the
8% number are not reported, then the difference shows on the W2 as a separate item. The employee is obligated to include the allocation in the earnings. Failure to do that opens them up to an audit.no wonder my waiter tries to get me to pay in cash and frowns every time i whip out my credit card.
Yep.. I had a waitress at one night club tell her customers that the club required her to pay the credit card fees on her tips so she asked them to tip cash. She had zero credit card tips, even though she had significant credit card sales. She declared ZERO cash tips. Another side to this is that if an employee does not make tips, the employer can not claim the tip credit so they have to pay the server full minimum wage. I went to ask her about it. She flipped off there ain't nuttin you can do about it. I had stop working .. take a seat while I cut her final check. I told her if she had as much sales as she showed and no tips, she must be mistreating our guests. I told her the owners wouldn't tolerate that. She started declaring a more realistic amounts.
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