No employer shall collect, take, or receive any gratuity or part thereof, paid, given to, or left for
an employee by a patron, or deduct any amount from wages due an employee on account of such
gratuity, or require an employee to credit the amount, or any part thereof, of such gratuity against
and as a part of the wages due the employee from the employer. (Labor Code section 351.) If this
prohibition is violated, any amount of such gratuities received by the employer will be considered
a part of the gross receipts of the employer and subject to tax.
Optional tips are not included in gross receipts and are not subject to tax.
Mandatory tips, such as those applied by a restaurant when a party exceeds a specific number of
patrons, are considered part of gross receipts and subject to tax. Each restaurant may have its
own policy with respect to the specific number of patrons necessary before a charge for tipping is
mandatory. Ex: “A 17% gratuity will be added to parties of 8 or more.”
The auditor should discuss tipping with the taxpayer and if necessary examine the taxpayer’s
payroll records as verification of the taxpayer’s policies.