Do you know – according to law – what a tip is and what that means for housekeepers and hotel owners? We get to the facts in Part 1 of our new series, ‘Tips, Pay, and Tax.’
What counts as a tip in the eyes of the law makes a big difference to hotel managers, owners, and housekeepers alike. In this blog post, we get to the bottom of how the law defines a tip, how this differs from other forms of payment, and what this means for you.
What’s the definition of a tip?
What makes a tip a tip? The IRS have put a great deal of thought into this and come up with four key criteria that need to apply for any payment to be considered a tip. Let’s take a look.
1. The tip must be paid voluntarily
At first glance, this may seem silly. However, this is actually one of the most useful of the four criteria. Why? Because of the ambiguity around service charges.
Customers frequently find the difference between service charges and tips confusing. The internet is riddled with questions on online forums such as, ‘What’s the difference between a tip and a service charge’, and ‘If there’s a service charge, do I tip?’
The service charge is different from a tip in a number of important ways as we’ll see later, but for now the most important difference between a tip and a service charge is this:
You don’t have to pay a tip to receive the service, with a service charge, you do.
When the IRS say a tip has to be voluntary and cannot be coerced, they aren’t imagining that nefarious hoteliers and restaurateurs are at large, putting guns to people’s heads and demanding tips. They’re simply considering that key difference.
A tip is discretionary, and providing the service is no guarantee of receiving any single tip, even if tips are customary or received frequently.
2. The customer has to decide the amount
This is another key difference between a tip and a service charge. When you look at your bill and see “10% service charge”, that’s a number that the customer has arrived at.
It’s not just a suggestion, either. Nobody expects the customer to try and negotiate the value of the service charge down.
But with a tip, the customer is free to give as little or as much as they like, regardless of what custom may suggest.
If tipping the hotel housekeeper $1-3 per night in a mid-range US hotel is customary, that’s not legally enforceable. And nobody is going to arrest you if you don’t tip the usual 20% after shoddy service in a restaurant.
3. The payment mustn’t be negotiated or determined by the employer
A tip is between the customer and the service worker. Employers like hotel owners or managers can make it easier to tip – by introducing a service like TipZyp or placing envelopes in the rooms – but the exchange itself can’t involve them.
The tip is something decided by the customer along with the amount, and the employer cannot intercede.
A hotel manager can’t be a go-between between a housekeeper and a customer, negotiating the value of the payment, for example.
4. The customer must decide who receives the payment
Within reason. So, if a hotel guest leaves an envelope filled with cash in their room with ‘tip’ scrawled on the front, nobody is going to contest it’s a tip.
But have they decided who receives the payment? Well, sort of.
By leaving it in the room we can infer they mean it for whoever is likely to come and find the tip. Perhaps the same person who has been cleaning their room throughout their stay, but quite possibly not (housekeepers do change, day-to-day, at many hotels).
Perhaps the customer is aware of this. If they tip at the end of their stay in the manner we’ve described though, they may mean for the tip to be distributed among those housekeepers who have maintained their room throughout their stay.
Or simply the last housekeeper who comes in and picks it up. There’s no sure way to know, unless the guest has made their wishes known explicitly.
Ways to address this include raising awareness generally that it’s good etiquette to tip throughout a stay, rather than just at the end.
You can also help guests make their wishes known by using a service like TipZyp, who can provide guidance to the guest on how to tip without you having to get involved.
When are tips something you have to keep track of?
If you or your employees take home less than $20 per month in tips, don’t worry about keeping track. The IRS isn’t interested.
However, if you (perhaps you’re a housekeeper) or your employees, if you’re a hotel owner or manager, receive more than that amount, you need to keep a record of it.
As an employee, you need to record how much you receive, when you receive it, and report it to your employer for tax purposes.
We’ll go into more detail around the specific responsibilities and tax obligations of tipping in part 3 of our current series, ‘Tips, Pay, and Taxes.’
Stand by for part two, when we’ll discuss pay, and how tips work with income.