Illinois mandatory gratuity and sales tax for large parties

Illinois Department of Revenue guidance says that a mandatory gratuity or service charge that is separately stated on the bill and actually paid over to the service employees as tips, or as a substitute for tips, is not subject to Illinois sales tax. A charge your business keeps is part of the price and is taxable. The guidance is a general information letter, not a binding rule, so keep the policy tight and the payout records complete.

What does the Department's guidance say?

In a general information letter numbered ST 24-0019-GIL, the Department addressed whether sales tax applies to a mandatory service charge or tip added to a restaurant bill. The summary of that letter is that mandatory gratuities or service charges that are separately stated on the bill and actually paid over to the service employees as tips, or as a substitute for tips, are not subject to Illinois sales tax. The business should also keep payout records for the service staff. Read the full text of the letter for any further conditions before you rely on it.

Why is it a guidance letter and not a law?

General information letters answer a question in general terms, and the Department says they are not statements of Department policy and are not binding on it. A letter is still a useful guide to how the Department reads the law. Ask your accountant whether to request a private letter ruling if the amount is large.

What does separately stated mean?

The charge must appear on the bill as its own line, labeled for what it is, apart from the food and drink. A menu price that already includes an amount for service is not separately stated. Say on the menu when the charge applies, such as for parties of eight or more, and state the percentage.

What does actually paid over mean?

The money has to reach the service employees. If you take the charge into revenue and then pay the staff something else, the charge is not paid over. Pay the money to the people who served the party through payroll, and record who received what. The test is about what happens in practice, not what the menu says, so the records matter as much as the wording.

A worked example of the records

A party of ten generates a $400 check and an 18 percent gratuity of $72. Your records show the check number, the party size, the gratuity line, the date the $72 went into payroll and the names and shares of the three servers and a busser who received it. If an auditor asks, you hand over the policy, the menu page and those records. If any of the money stayed with the business, such as a share to cover card fees beyond what you are allowed, the treatment is at risk.

What about card fees?

The federal rules let you deduct from card tips no more than the card company charges, so treat that deduction carefully. If the gratuity is paid out in full, with the deduction limited to the processing cost of that charge, document it. Ask your accountant how a deduction affects the sales tax result.

What is the difference from a service charge you keep?

A charge for private dining, an event fee or a house fee that your business keeps is part of the price and is taxable. Label it for what it is and keep it apart from the gratuity line. Do not name a retained charge a gratuity.

How should you set up the policy?

1. Decide the party size and percentage and print them on the menu.
2. Add a gratuity line, separate from food and drink.
3. Pay the amount to the serving staff, with records.
4. Do not apply sales tax to the gratuity line.
5. Review the policy with your accountant each year.

How should you talk to guests about the charge?

Tell the party when they book: an 18 percent gratuity is added for parties of eight or more, and it goes to the service team. At the table, the server says the same sentence once. If a guest asks to change it, a manager can offer to make it a voluntary tip line for that check, and record the change. A voluntary tip is outside the sales price, so the choice does not create a tax problem, and it keeps the conversation friendly.

What if your policy changes later?

If you change the percentage, the party size or who receives the money, update the menu, the confirmation emails, the check template and the written policy on the same day, and keep dated copies of the old versions. Brief the staff. A change that is applied on the floor but not written down is the kind of gap that causes trouble in an audit.

More guides for your business:

• Illinois tip pooling and service charges for restaurants
• Illinois restaurant sales tax: how Chicago and Cook County rates stack
• Illinois interchange fee law and card fees on tips and tax

More in the US guides for food businesses.