Taxing Definitions

Definition — The tipping point

Thanks for sharing!
3 minute read
Image source: Sam Truong Dan on Unsplash


To tax those tips or not? Tips are not defined in the tax code or regulations so the determination of whether a payment is a tip depends on four factors. The absence of any one factor creates doubt as to whether the payments are tips.

In Office of Chief Counsel memorandum 2018-16010, the question was whether cash amounts distributed to individuals from “tip boxes” were tips.

Here are the facts.

The taxpayer engages individuals to perform services at the taxpayer’s request and on the taxpayer’s premises. The taxpayer treats the individuals as volunteers and does not directly pay the individuals any form of compensation or benefits for their services.

The individuals receive cash payments from amounts contributed by customers. The cash amounts are deposited by customers in “tip boxes.” Customers are not required to make cash contributions and have discretion on how much cash to contribute (including none).

The amount of cash in the “tip boxes” is distributed at the end of each shift. Individuals who performed services during a shift determine how to allocate the tip box amount between all of the individuals who performed services during that shift.

The taxpayer does not have a system in place for individuals to provide written statements reporting the cash amounts received and has no knowledge of the specific amount of cash received by each individual. The taxpayer does not issue Forms W-2, Wage and Tax Statement, to the individuals and has not included any wages or taxes in connection with their services on federal payroll tax returns.

The taxpayer has the right to direct and control the individuals as they perform services.

Per Revenue Ruling 2012-18, the factors used to determine if payments constitute tips are:

1) The payment must be made free from compulsion;

2) The customer must have the unrestricted right to determine the amount;

3) The payment should not be the subject of negotiation or dictated by employer policy; and

4) Generally, the customer has the right to determine who receives the payment.


Note that this situation involved a tip jar and the determining factor is number four.



Make your selection, then hover your mouse
over the link beneath “The Decision”



For a full explanation, hover your mouse over the link



Note: Taxing Lessons provides a summarized version of sometimes lengthy internal revenue service decisions. The full document may include facts and issues not presented here. Please use the link provided in the post to read the entire document.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.


Other posts you might enjoy

Definition — Underestimating the estimate Image source: Dreamstime public domain Never underestimate the value of fun or tax payments. You'll pay the price in the long run. As a general rule, you're required to pay federal income tax as you earn income. The payments can be in the form of tax withholding from wages or pensions...
Definition — Laughter and other medical dedu... Image source: Laughter may be the best medicine, but it's also one you can't get a tax deduction for. Fortunately, plenty of other medical expenses qualify. What are those expenses? Here's a quiz to test your knowledge. 1 As a general rule, when adding up you...
Definition — Old or new? Image source: Benjamin Wong on Unsplash The December 2017 federal income tax law changed certain business tax items beginning with 2018 filings. Do you know which of the following statements are from the new law? Deduction for meals and entertainment A A business can deduct ...
Definition — Safe harbors and taxes Image source: Back in August, the IRS issued proposed regulations about the new limitation on federal income tax deductions for state and local income taxes (see Taxing Lessons post here). After the proposed regulations were issued, the IRS continued to receive questio...
Right answer!
Sorry, wrong answer :(

Under the facts presented, the four factors set forth in Revenue Ruling 2012-18 have been satisfied. The fact that the cash contributions are collected by the individuals who work during the shift and pooled for purposes of distribution among them satisfies the fourth factor. The customers generally have the right to determine who receives the payment when the tipped amounts are pooled and the individuals working each shift distribute the cash among themselves.

Tagged , ,