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CA – Are tips/gratuities taxable? Well, it depends…

Posted by salestax on March 31, 2009

According to this special notice from the CA BOE tips may be taxable if the restaurant doesn’t allow you to make your own choice.  Meaning:

If what you’re purchasing is taxable then:  If the tip is up to you – no tax; but, if the tip is required, the tip is added to your bill and then tax is calculated.

If it’s an exempt service you’re buying – tips are exempt too.

So, for you small business owners, if you automatically add a gratuity to the customer’s bill, then you need to make sure that tax is being calculated on it just like another line item of goods being sold.  This could make customer’s shy away from your business if it’s something the public feels strongly about.  Be sure to weigh the options, because now it can be adding to the customer’s overall bill. 

Example:  Dinner service for a party of 8.

CA Tax:  9.25% (example)

Total Tab:  $200

Tax:  $18.50

Discretionary Tip (20%):  $40

Total Bill:  $258.50

  • ******************

Total Tab:  $200.00

Required gratuity (20%):  40.00

Tax:  $22.20

Total Bill:  262.20

  • **********************

Difference:  $3.70 – could make a difference to some on where they choose to eat in large parties.

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7 Responses to “CA – Are tips/gratuities taxable? Well, it depends…”

  1. […] And, if you’d like to brush up on what California says about the sales tax implications on gratuities, click here. […]

  2. Debashish Sahu said

    I have worked with an organization for 4 years and got gratuity. I want to know the amount is taxable or not?

    Thanks,
    Debashish

    • Cosy said

      Absolutely, the tips are taxable. The restaurant will or should add a certain amount of tip income as required by law to the employee wages or W-2.

  3. Access site…

    […]CA – Are tips/gratuities taxable? Well, it depends… « The Sales Tax Connection[…]…

  4. pam said

    I work in the casino as a blackjack dealer, why is it that us dealers get taxed on our tips?? Tips are like a gift, why should we get taxed on it?
    for example when we go cut our hair or do our nails and we tip them they dont get taxed 100%, so why should we??

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