Are you treating your employee gratuities correctly?

In 2012, the IRS announced a new revenue ruling related to employee tips that takes effect January 1, 2014 (postponed from 2013).  Under this ruling, the IRS now makes an important distinction between tips and service charges (including prepaid gratuity fees).

According to the IRS, a tip is generally an additional amount voluntarily added (or given without compulsion) by a customer to the customer’s check (where the customer has an unrestricted right to determine the amount) and paid to employees.

Many private clubs, rather that allowing member tipping, include either a mandatory service charge on a member’s check or charge their members a prepaid gratuity fee.

Why is this important?

In the most general terms, under the IRS ruling, tips are income to your employees while service charges and prepaid gratuity fees are income to your club.  This means that automatic gratuities such as mandatory service charges and prepaid gratuity fees will be classified as regular wages and subject to payroll tax withholding when paid to your employees.

While this, in and of itself, may only seem to result in additional paperwork for the employer, the larger issue is how the services charges and automatic gratuities can affect your club’s payroll costs.

Overtime is a cost that can easily have a negative impact on your clubs bottom line and this ruling may have a significant impact on those costs.  During a club’s busy season, there are many times that clubs need their employees to work overtime to meet member demand.  When a club pays out a portion of the mandatory gratuities or service charges to its employees, the club may have to recalculate its employee’s base hourly rate of pay and resulting overtime rates.

Some other consequences that a club may have to evaluate and consider the effect of include:

• If a club is a taxable entity rather than a not-for-profit organization, the taxability of the service charges and the loss of the business credit related to tips may need to be assessed.
• If a club allows tipping but also charges service charges on large groups and banquets, the club will need to implement an accounting system to properly track and allocate the tips/service charges and resultant effects on the employees hourly rates of pay.

Laydon and Company’s Private Club Services Group professionals can help you review your current accounting for tips, service charges and prepaid gratuities to ensure you are in compliance with Internal Revenue Service requirements.

If you have any questions or need any assistance in this area, please contact Elmer Laydon of our Private Club Services Group.

• Country club employee pleads no contest to embezzling more than $125,000.
• Theft charges filed against country club employee.
• Country Club employee awaits trial for allegedly stealing from the club.
• Head bookkeeper at country club arrested after audit shows loss of about $50,000.
• Employee of country club arrested for theft exceeding $10,000.
• Club employee charged with 29 felonies after nearly $200,000 went missing.
• Country club employee indicted for using club credit cards for over $69,000 of personal purchases.

Unfortunately, we all have read headlines similar to these.

Thefts by club employees are more common than one might think. According to an FBI survey of business managers, 38% consider fraud to be a serious problem in their company.

Employee theft can take one of many forms, including:

• Embezzlement
• Skimming
• Fraudulent disbursements
• Check tampering
• Billing schemes
• Payroll schemes

It is estimated that 75% or more of all employee related thefts go undetected. The real statistics are hard to quantify as many companies do not report employee related thefts for fear of the negative publicity they feel might come with the public disclosure of the theft.

There are steps a club can take to help prevent fraud from occurring:

• Establishment of a system of checks and balances
• Segregation of employee duties
• Employee background checks
• Regular audits and bookkeeping examinations
• Establish a fraud hotline
• Being alert to unusual activity by employees

Laydon and Company’s Private Club Services Group professionals can help you review your current anti-fraud programs or help you establish one if your club does not have one in place now.

If you have any questions or need any assistance in this area, please contact Elmer Laydon of our Private Club Services Group.

 

This article is designed to provide general information in regard to the subject matter.   As everyone’s facts and circumstances are different, this article has been prepared with the understanding that neither Laydon and Company, LLC nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, please call Laydon and Company, LLC’s Private Club Services Group to discuss your specific circumstances.

Does your Club offer to-go meals or have a wine club?

If so, the IRS may be interested in talking to you.

In an effort to find ways to continue to serve member needs, many Clubs have begun offering take-out meals on both a daily basis and for holidays.  In addition, because wine and liquor can be bought at volume discounts, those discounts are often passed on to members though wines club sales.

The IRS calls these types of business activities “non-traditional” for 501(c)(7) tax exempt private clubs.  They are considered “non-traditional” because the IRS has said they do not further the tax exempt purpose of the Club.  As such, they could potentially jeopardize your Club’s tax exempt status.

There are several areas the IRS has determined to be “non-traditional” business activities that are of concern for private clubs, including:

• Take-out food and beverage.
• Off-site catering
• Wine sales for off-site consumption
• Personal services including barber shops and long-term room rentals.

If the income from these activities exceeds a de minimis amount, that income could jeopardize your Club’s tax exempt status.  In fact, the IRS clearly tells its agents “Social clubs may lose their tax exempt status if the nontraditional business activities are not incidental, trivial or nonrecurrent”.

In determining whether a Club’s “nontraditional business activities are not incidental, trivial or nonrecurrent” (or de minimis), there appears to be no formal “safe-harbor” limit a Club can live within before it might have a problem.

IRS rulings have shed some light on what would be considered de minimis income from the areas considered to be non-traditional.  In one ruling, a Club was found to have exceeded the de minimis amount when its non-traditional income was greater than 5% of its total income.  However, it might well be that Clubs cannot rely on applying the 5% limit to their situations as the agent that wrote that opinion also stated that he was concerned that an amount in excess of $100,000 from non-traditional activities may not be deemed de minimis.

If your Club offers any of the services that might be considered non-traditional, we suggest that you quantify the amount of income from these areas and determine if you could be facing a problem.  If so, we urge you to take steps to eliminate the areas that could be problematic.

If you have any questions or need any assistance in this area, please contact Elmer Laydon of our Private Club Services Group.

 

This article is designed to provide general information in regard to the subject matter.   As everyone’s facts and circumstances are different, this article has been prepared with the understanding that neither Laydon and Company, LLC nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, please call Laydon and Company, LLC’s Private Club Services Group to discuss your specific circumstances.