An automatic 18% or 20% gratuity added to a large party's check is a service charge, not a tip. The IRS treats any part of it that's paid to you as wages: your employer withholds income tax and social security and Medicare tax on it, as it does on your hourly pay. It is not a qualified tip for the 2025–2028 tip deduction. Anything the guest freely adds on top of that charge is a tip. So log the two amounts separately.
Thanksgiving week and December office parties bring the biggest checks of the year, and most of them carry an auto-gratuity. This guide explains how that charge is treated for tax and pay purposes, and what to write down. For the deduction's caps and income limits, see the No Tax on Tips guide. For reporting voluntary cash tips to your employer, see do I have to report cash tips?.
The IRS test: four factors
Rev. Rul. 2012-18 is the IRS's main guidance on tips for social security and Medicare tax purposes. It lists four factors. If any of them is missing, there is doubt that the payment is a tip, and it may be a service charge:
| Factor | Typical voluntary tip | Typical large-party auto-gratuity |
|---|---|---|
| 1. Paid free from compulsion | The guest can leave the tip line blank | Added to the bill by the restaurant |
| 2. Customer has the unrestricted right to set the amount | The guest picks the amount | The percentage is set in advance |
| 3. Not negotiated or dictated by employer policy | No house rule sets it | Set by house policy (menu, POS, or event contract) |
| 4. Customer generally decides who gets it | The guest tips their server | The house decides how it is split |
The ruling says all the surrounding facts and circumstances must be considered. Its Example A matches the classic large-party check: a menu says 18% is added for parties of six or more, the 18% appears on the "tip line," and the restaurant pays it to the servers and bussers. The IRS concluded that the charge was not paid free from compulsion and was dictated by employer policy. So it is a service charge, not a tip.
The ruling also cites an older IRS ruling on a fixed banquet charge that is distributed to waiters, bussers, and bartenders: that is a service charge too. That covers many private holiday events booked under a contract. The IRS's tip recordkeeping and reporting page lists these examples of service charges:
- automatic charges added to a bill, such as a mandatory 18% for large parties
- required gratuities in a contract or invoice
- digital payment prompts that require a tip greater than zero before the customer can pay
The name on the slip doesn't decide it. A charge printed as "gratuity" or placed on the tip line can still be a service charge.
What that means for your taxes and your pay
| Question | Auto-gratuity (service charge) | Voluntary tip |
|---|---|---|
| Whose money is it first? | The employer's. The IRS says service charges are income to the employer whether or not it distributes them. | The guest's gift to you, received directly or through the restaurant |
| How it reaches you | Through payroll, as wages | Cash in hand, card tips paid out, or tip sharing |
| Withholding | The employer withholds income tax and your share of social security and Medicare tax | Withheld on the tips you report to your employer |
| Your monthly tip report | Not part of it | Report cash and card tips if they total $20 or more in a month |
| Form W-2 | Included as wages | Included as reported tips |
| Qualified tip for the deduction? | No | Can be, if all the other rules are met |
Sources: the IRS tip recordkeeping and reporting page, Publication 531 (Rev. December 2024), and Rev. Rul. 2012-18. Because the charge is wages and not a tip, you shouldn't expect it in the tip boxes of your W-2. See the W-2 tip boxes guide for what each of those boxes holds.
Federal minimum wage rules. The Department of Labor's rule at 29 CFR 531.55 says a compulsory service charge is not a tip under the Fair Labor Standards Act, even if the employer distributes it to employees. The same goes for amounts built into a hotel banquet contract for staff. Service charges become part of the employer's gross receipts. When the employer distributes them, they can be used in full toward its federal minimum wage obligations. Your state may have its own rules, so check your state labor department.
Auto-gratuity and the 2025–2028 tip deduction
The qualified-tips rules are now final, not proposed. Treasury and the IRS published final regulations, T.D. 10044, in the Federal Register on April 13, 2026 (also in Internal Revenue Bulletin 2026-18). They take effect June 12, 2026, and apply to tax years beginning after December 31, 2024, so they cover 2025 returns too. Under the regulation text, § 1.224-1(c)(4):
- Service charges, automatic gratuities, and any other mandatory amounts the establishment automatically adds to a bill are not qualified tips, even if they are later distributed to employees.
- Any amount the customer voluntarily pays above the mandatory amount is a qualified tip if all the other requirements are met.
- If the customer is expressly given the option to disregard or modify an amount added to the bill, including to zero, that amount is not mandatory.
Some commenters asked Treasury to treat automatic gratuities as tips, or to allow a 2025 transition rule. The preamble rejected both. It said a customer's ability to choose a different restaurant isn't the same as choosing whether to tip, and the business, not the customer, sets the percentage. It also noted that the IRS's position on service charges has been public since at least 2012.
How the deduction itself works (the $25,000 cap, the income phase-out, Schedule 1-A) is covered in the No Tax on Tips guide. This post doesn't repeat it.
When the guest adds more on top
Holiday parties often leave a little extra on top of the auto-gratuity. Publication 531 covers this in its Example 3: the restaurant puts 18% on the tip line, and the guest writes 2% on an "additional tip line." Because the guest was free to leave that line blank, the 2% is a tip and goes in your tip diary. The 18% doesn't. The final regulations reach the same result for the deduction.
Cash the guest hands you on the way out works the same way. If they chose the amount, it's a tip, and you report it with your other cash tips.
How to log an auto-gratuity shift
Publication 531 says not to write a service charge that your employer pays you as wages in your tip diary. That doesn't mean you should forget it. Keep it in its own column, so your tip totals stay clean and you can still check your paycheck.
Here is one way to log a hypothetical party of 14 on a $1,200 food and beverage check with a 20% auto-gratuity. Suppose the guest also adds $30 on the additional tip line and leaves $20 in cash. The split of the $240 below is made up for this example. Your restaurant's policy decides the real one.
| Log column | Amount | Why |
|---|---|---|
| Card tips (voluntary) | $30.00 | Added by the guest on the additional tip line |
| Cash tips (voluntary) | $20.00 | Handed to you, amount chosen by the guest |
| Auto-gratuity on the check | $240.00 | 20% service charge set by the house. Not a tip. |
| Your share per house policy | $180.00 | What the restaurant says it pays you, through payroll |
| Paid on which paycheck | (date) | Fill in when it arrives, then check it against your pay stub |
Only the $50 in the first two rows goes into your tip totals and your monthly tip report. If you tip out on tips, use the policy your restaurant actually applies to each amount, and don't subtract the same tip-out twice. Your checkout slip usually prints auto-gratuity or service charges as a separate line, which makes this easier to split at the end of the night.
A few habits help during the holidays:
- Write the party size and the check number next to the entry, so you can match it to the checkout and pay stub later.
- Keep event contracts or banquet sheets that state a required gratuity. Those amounts are service charges too.
- Note when a manager removed or reduced the auto-gratuity at the guest's request. Whatever the guest then chose to leave is a voluntary tip.
The free tip log template has room for notes, and TipScan lets you record shifts and export them as CSV for free. For the daily habit itself, see how to keep a tip log.
What to ask your manager
Before the big parties start, ask:
- What triggers the auto-gratuity, and at what rate? For example, the party size, a private-event contract, or both.
- Can the guest remove or change it? If the restaurant expressly lets the guest change it, including to zero, the final regulations say it isn't a mandatory amount.
- How much of it do I get, and who else shares it? Servers, bussers, bartenders, the house.
- How is it paid? On my paycheck as wages, or in cash at the end of the night? Which pay period?
- Is it kept out of my tip report? Ask whether the POS records it as a service charge, not as a tip I declared.
- Is an extra amount on the additional tip line paid and reported to me as a tip?
Write the answers down with the date. If your pay stub doesn't match what you were told, those notes and your log are what you bring to payroll.
Reviewed against Rev. Rul. 2012-18, IRS Publication 531 (Rev. December 2024), the IRS tip recordkeeping and reporting page, 29 CFR 531.55, and the final regulations in T.D. 10044 (91 FR 19026, April 13, 2026) on November 9, 2026. General information, not individual tax or legal advice. State and local rules can differ.