Who hasn’t, at least once, upon receiving a restaurant check, automatically added a tip to the total without noticing that a gratuity was included? I’ll admit to having fallen victim to this at least once (maybe twice?). Thanks to new IRS rules, automatic tipping may soon become a thing of the past.
It’s hard to say where, when, and in what industry the practice of tipping began, but it is an institution in the restaurant business. It is not uncommon for restaurants to pay their employees at, or below, the federal minimum wage on the basis that the shortfall is more than made up when tip income is added. All tip income has to be reported to the IRS, and all applicable income taxes have to be paid.
While some restaurant computer systems track and report tips that are paid by credit card, restaurant employees are otherwise pretty much on the honor system when it comes to tallying their tips, reporting them to the IRS, and paying the taxes due. The restaurant is then required to report the same amount to the IRS and to pay Medicare and Social Security taxes on those amounts.
Reasoning that a gratuity that is automatically added to a restaurant check is no longer voluntary, the IRS will treat automatic gratuities, not as tips, but as service charges beginning January 1, 2014. Instead of restaurant employees taking their tips home at the end of their shift, reporting the tips and paying the taxes on their own, automatic tips will be considered as part of the employee’s regular wages, subject to payroll tax withholding, and not paid until the employee’s next regular paycheck.
As a result of the rule change, and the additional accounting costs to the restaurants that will result, many restaurants (including some large national chains) have announced that they may do away with automatic tips altogether. Some restaurants are replacing automatic tips for larger groups with checks for all diners that show the calculations for tips in varying amounts: 15%, 18%, and 20% for example. All the diner needs to do is indicate which tip (if any) is to be included. One report I read even indicated that some restaurants have adopted the practice of automatically including a tip in the total bill, along with the printed caveat that the customer has the right to change the amount or delete it altogether. Whether or not this approach will satisfy the IRS requirement of voluntariness is unknown.
Because of the rule change, restaurants that continue the practice of automatic tips will incur additional paper work, accounting and other costs. While it is claimed that the rule change will have little impact on consumers, logic dictates that increased costs will inevitably be passed on.
Not yet knowing how all of this will play out, the best advice we can give is that when you’ve finished ringing in the New Year this upcoming January 1, you would be well advised to take a very close look at your restaurant check.