Policy Statement : Effective immediately, all tips received by employees are exempt from federal taxation.
Employers are prohibited from including tips in the taxable income of employees when reporting earnings to federal authorities. This exemption applies to tips received directly from customers, pooled tips, and gratuities distributed by employers. Non-compliance with this policy will be subject to review and possible legal action.
- PurposeThis policy aims to ensure fairness in the taxation of gratuities received by employees in service-oriented roles. By exempting tips from federal tax, the policy recognizes the voluntary nature of tips as customer contributions to service quality, which have already been taxed as part of the payer’s income.
- ScopeThis policy applies to all employees in roles where tips are customarily received as part of their compensation. It affects employees in the hospitality, food service, personal care, and other customer-facing sectors. It applies nationwide and includes full-time, part-time, and temporary workers.
- Definitions
- Tips: Voluntary payments made by customers to employees as a reward for service.
- Payer’s Taxable Income:: The income of the customer or client who provides the tip, which is already subject to taxation.
- Federal Tax: Taxes levied by the federal government on earned income.