The 85% Share of Employees from the 10% Service Charge Collected from Customers Treated as Compensation for Services Rendered as a Result of Employer-Employee Relationship, and Therefore Includible as Part of Compensation Subject to Income Tax and Consequently to Withholding Tax

May 20, 1997 BIR RULING NO. 062-97 28 000-00 062-97 Sugarhouse, Inc. 30 Arayat Street corner Bulusan Street Mandaluyong City Attention: Ms . Nora C . Francisco Accounting Head Gentlemen : This refers to your letter dated January 29, 1997 requesting for a ruling on the following queries: "First, is the 85% share of the employee from the 10% service charge be considered as a gratuity?; "Second, is the 85% share given directly to the employees at a later time but temporarily with the employer for safekeeping exempted from withholding tax?; "Lastly, is the 85% share of the employee out of the 10% service charge collected from the customers that is not accounted for in the books of account of the company subject to withholding tax?" It is represented that you are engaged in the restaurant business which specializes in the sale of cakes, pastries and other food stuff; that your transactions include both dine-in and take-out services; that only dine-in transactions are subject to the 10% service charge; that the 10% service charge is included as part of the store's record of sales but is not included in the actual sales; and that such service charge is segregated and set aside for a certain period and 85% of which is given to all regular employees of the company every 7th and 22nd of each month. In reply, please be informed as follows: 1. A gratuity is something given freely or without recompense, a gift; something voluntarily given in return for a favor or service; a bounty; a tip on the other hand, is a gratuit y. (p. 439, Volume 18A, and p. 361, Volume 41A, Words and Phrases) In this connection, the term "gratuity" as adopted in paragraph 7, Section 2(a) of Revenue Regulations No. 6-82 as amended by Revenue Regulations No. 12-86 is synonymous with the term "tip" which is paid directly to an employee by a customer of an employer, and not accounted for by the employee to the employer. The 85% share of the employees from the 10% service charge cannot be considered as a tip or gratuity as the customer is obligated to pay the 10% service charge which is part of the customer's check for dine-in services. Such being the case, the 85% share of the employees from the 10% service charge cannot be considered a tip or gratuity within the purview of paragraph 7 Section 2 (a) of Revenue Regulations No. 6-82 as amended; 2. For purposes of the withholding tax, the term "compensation" means all remunerations for services performed by an employee for his employer unless specifically excepted under Sections 27, 28 (b) and 71 of the Tax Code, as amended. Moreover, compensation income includes all income payments received as a result of an employer-employee relationship, such as salaries, wages, honoraria, bonus, taxable pensions, allowances, fringe benefits, fees, and other income of similar nature . (Emphasis supplied) Such being the case, any and all amounts received by the employees from their employer as a result of an employer-employee relationship and which is considered as a remuneration for services rendered shall be treated as compensation subject to income tax and consequently to the withholding tax. The 85% share of your employees from the 10% service charge collected from your customers shall be treated as compensation for services rendered as a result of an employer-employee relationship, and therefore is includible as part of their compensation subject to income tax and consequently to the withholding tax. Thus, notwithstanding the fact that their share is being withheld for safekeeping and given at a later time, and that such is not accounted for in the books of account of the company, is immaterial in the determination of whether or not it is subject to withholding tax. The answer to the last query is no longer necessary in view of the answers to the first and second queries. Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue