Thursday, October 24, 2013

Automatic Gratuities

Beginning on January 1, 2014, the IRS will require restaurants to categorize automatic gratuities as service charges and include them in employee’s paychecks as regular income. What are automatic gratuities? I’m sure you’ve seen them and possibly experienced them when dining out with large groups. Often the restaurant will add an 18% or higher gratuity for parties of 6, 8 or more diners. The intent of this is to keep servers from losing out on gratuity for large parties because of the large bill.

It’s always been one of those charges that irks me a bit because I want to determine how well the wait staff took care of us when determining how much I will tip. I know there are those who balk at paying 18-20% when the total bill is very large but I dislike being forced to pay a specific amount no matter what the service was like. As a result, when the gratuity is automatically added I rarely add additional money unless the staff was beyond exceptional. It’s just a little pet peeve of mine.

The consequence of the IRS’s ruling is that most restaurants are likely to eliminate this practice to avoid having to track the charge as wages, withhold payroll taxes and report it on W-2s. In addition, if employers maintained this practice, the gratuities could not be used to reduce the minimum wage obligation as they are now. In addition, servers will have these gratuities automatically reported to the IRS and will have to wait to be paid until payday when the money will come in their paycheck rather than receiving the money the same day. Under the current practice, automatic gratuities are classified as employee tips and must be reported by the employee rather than the employer.

It will be interesting to watch to see how employers react to this ruling and whether the automatic gratuity disappears from the industry. Many large chain restaurants have already begun phasing the practice out.

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