How should an 18% service charge included in a restaurant bill for a party over six people be classified for the employee?

The 18% service charge that is automatically added to the bill for a party of more than six people is classified as wages for the employee. This is due to the fact that the service charge is mandated by the restaurant and is not a voluntary tip given by the customers. The IRS considers mandatory service charges to be part of the employee’s wages because they are treated as compensation for the services rendered, rather than a gratuity.

In contrast, tips are usually defined as discretionary payments made directly by the customer based on their satisfaction with the service. Since the service charge is automatically included in the bill and not left to the customer's discretion, it does not meet the criteria for a typical tip.

Additionally, while a tip diary can be useful for employees to track discretionary tips they receive, it doesn't apply to mandatory service charges. Similarly, the classification of the service charge as nontaxable income is not accurate, as it is categorized as wages and is subject to income and payroll tax withholding.