Did the IRS Just Kill the Automatic 18-Percent Tip for Big Parties?

Categories: Chewing the Fat

TipAnyone.jpg
Somone left a tip, right?
The Wall Street Journal has an interesting article today about a new IRS tax rule that could affect your next large celebratory dinner. It has to do with automatic gratuity charged for large parties at restaurants. You know the asterisk at the bottom of the menu in 10-point font:

(*18-percent gratuity added to parties of 8 or more.)

In theory it's a way to ensure that servers who work for below minimum wage rates don't get hosed after a long dinner session. But in the aftermath are a lot of issues -- some legal, like tax reporting, and other personal, like diners not inclined pay the amount, or sometimes, double paying a tip, not realizing it was already added.

Regardless, the new law puts restaurant owners and operators between a rock and a tax hit. Staring January 1 2014, every time this "service charge," as it's now categorized, is added to a check, the money is subject to payroll tax withholding. For servers that typically walk to their car with a roll of cash in their pocket, this particular "service charge" will show up on their paycheck instead. Then, as far as reporting procedures? Well, that income has now been tagged.

We reached out to several Dallas restaurateurs today, all who were curiously silent on the issue. Perhaps they too are pondering what this means for the books in 2014 and their very important front-of-house staff.

For the technicalities, the IRS says the absence of any of the factors below indicates that gratuity may be a service charge:

(1) the payment must be made free from compulsion;
(2) the customer must have the unrestricted right to determine the amount;
(3) the payment should not be the subject of negotiation or dictated by employer policy; and
(4) generally, the customer has the right to determine who receives the payment. All of the surrounding facts and circumstances must be considered.

Julie Jargon, who wrote the piece for the WSJ, reported that Darden Restaurants, which owns Olive Garden, Red Lobster and Eddie V's, is trying a new system where they suggest a tip amount on bills, which punches a hole in the four-point guideline above.



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12 comments
NotAnon
NotAnon

Credit card tips of any kind have been treated this way and taxed as long as I can remember.  All CC tips not just the added gratuities.   Also, all gratuities are assumed as received whether it's cash or not unless overridden by a manager. this should have no impact on places with up to date POS systems. Am I missing some details here? 

lewbowski300
lewbowski300

Present a customer with a bill with an amount, demand payment, get payment, pay taxes on it. Am I missing something? Whether it is withheld or not, the same taxes are obligated to be paid.


renizzay
renizzay

If restaurants increase the prices of the food to properly pay employees, perhaps it will cause the IRS to rethink this.

Todd Deatherage
Todd Deatherage

There were 7 servers on the floor, and instead of sticking them with the same server or servers, we'd draw straws to see who got them. :-)

Todd Deatherage
Todd Deatherage

:-) I was a server next door to IBM's accounting department. They'd come in groups of 10 or more, want separate checks, and half would stiff us and half would barely pay 10% :-) My statement was meant as sarcastic and not meant to be a universal lump. I'm glad you are different.

LaiLai Stewart
LaiLai Stewart

Hey! lol I'm an accountant and I 100% always leave a tip bigger than 15 %...mostly because my mom was a bartender and I know how hard they work and how hard it is for all servers...no lumping folks please :)

Todd Deatherage
Todd Deatherage

Accountants never were known to be fair tippers. I know it's not because they can't do the math.

J_A_
J_A_

Wow really?! Blood sucking bastards

primi_timpano
primi_timpano topcommenter

Just don't itemize, just a piece of paper noting the final price. Just take cash. The customers will understand.

Bobtex
Bobtex

@JaniceA To whom are you referring as "bastards"?  If you mean the IRS, then all those millions of folks who HAVE to pay their taxes because they are withheld from their wages might disagree, since the rules close up a cash-payment loophole whereby servers were known not to report, and not to pay taxes, on their cash tips.  Yet another reason to get rid of this felonious charade and include the cost of service in the meal or separately stated while at the same time requiring employers to pay their servers a living wage so that they don't have to scrounge for tips.

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