Gratuity Fund

JDauer · December 2007

Our assisted living communities employees are not allowed to accept gifts, tips, etc from their residents. Instead there is a Gratuity Fund set up every year that residents and their families can contribute to.

During the holidays this fund is given out in one or more ways to each employee based on certain calculations (length of employment etc.). Is this money not taxable??? They are tips!! They are given to EACH employee!

To my dismay this information was not shared with payroll for taxation. What the?

Am I wrong here?

C Wilson · December 2007

Yes, this is taxable. We have a similar system where our members donate to a Christmas fund & it is distrubuted to employees based on length of service. It is is taxable, but deductions for health insurance etc. are not taken out. If an employee has a 401K then that deduction is withheld.

If you have another payroll in this year I would suggest that you make a correction to the taxes for the current year. The employees are not going to be happy about this one!

As for past years, I would wait & see if the IRS catches it. I believe the limitation is 3 years.

stilldazed · December 2007

The money is taxable because your company is exercising control over the fund and deciding how the money is distributed. You can call the money 'tips,' but the fund does not satisfy valid tip pooling arrangements outlined in FLSA. As a holder of the money, your employer also has accounting records & interest gains to address if the money is held in any kind of interest bearing account.

For the money to satisfy the definition of tips, you must allow the giver (resident) to interact directly with the employee, decide how much to give and when, and notify your employee as required by FLSA that he/she is on an honor system to report tipped earnings to you for taxability purposes if the amount exceeds $30/month.

best wishes.

Gratuity Fund

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