A service charge is an amount added to a customer's check by management. IRS regulations state that a service charge is considered a part of the enterprise's gross receipts. In the case of catered affairs and banquets, the amount so charged is agreed upon in advance by the customer and management. Because the service charge is considered a part of gross recipts, many state tax authorities have argued that it should be subject to a sales tax. However, a discussion of that issue is beyond the scope of this article.
Employers can no longer combine and report the withholding as a single amount.
Forms 941 and W-2 will require employers to separately report these amounts. This tax is to be paid from deductions from wages, exclusive of tips under the control of the employer or from funds received from the employee for making the payment. A discussion and example of priority of the application of taxes withheld is presented in the tax withholding section of this article. An employee must maintain sufficient evidence to establish the amount of tip income received in a tax year. A daily record on IRS Form 4070A, Employee's Daily Record of Tips, or other credible or reliable evidence is usually sufficient.