Restauranteur Blog

Automatic gratuity at restaurants is re-classified by the IRS

Vincent Gisriel - Monday, January 06, 2014

As of January 1, 2014, the Internal Revenue Service will classify the automatic gratuities that most restaurants add to a table of six or more customers as a service charge. Service charges will now be classified as taxable income just like regular wages and will be subject to payroll tax withholding.

So what does this mean for the employer and employees in the restaurant business?

Employers (restaurant owners) have pretty much decided to do away with automatic gratuity practices to avoid the nightmare of additional accounting. Employees such as bartenders, servers and bus persons are basically screwed because customers can get away with not tipping the correct amount on large checks. A waitress who did not want to give her name from a large restaurant corporation explains, "The only good part about taking care of large parties was that you always knew that you were going to be paid fairly for your hard work. Now that security blanket is gone and we will just have to take our chances. This is a just another example of how the rich continue to get richer and the poor stay poor."

Some restaurants have decided to add a suggested tip amount to each and every check that starts at 18% goes to 20% and even shows 22% to combat the recent changes. It will take some time to see if customers decide to do the right thing when it comes to tipping. And here is a quick reminder for anyone who doesn't know already, most bartenders, servers and bus persons are living day by day on the tips that you leave at your favorite restaurant. The tips are their salary.