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IRS ruling turns automatic tips into service charge.. Options · View
lafayettemister
Posted: Thursday, September 5, 2013 1:06:18 PM

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Joined: 10/4/2010
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Location: Alabama, United States
IRS rule causes restaraunts to rethink automatic tips

An updated tax rule is causing restaurants to rethink the practice of adding automatic tips to the tabs of large parties.

Starting in January, the Internal Revenue Service will begin classifying those automatic gratuities as service charges—which it treats as regular wages, subject to payroll tax withholding—instead of tips, which restaurants leave up to the employees to report as income.

The change would mean more paperwork and added costs for the restaurants—and a potential financial hit for waiters and waitresses who live on their tips but don't always report them fully.

Darden Restaurants Inc., owner of Olive Garden, LongHorn Steakhouse and Red Lobster, has long included automatic 18% tips on the bill for parties of eight or more at its more than 2,100 restaurants, but is experimenting with eliminating them because of the IRS ruling, said a spokesman.

The chain in July stopped automatic tips at 100 restaurants in four cities, where it is testing a new system in which the restaurants include three suggested tip amounts, calculating for the customer the total with a 15%, 18% or 20% tip on all bills, regardless of party size. Diners can opt to tip more or less than the suggested amounts, or to not tip. Depending on how patrons react and how well the new software system works, Darden may switch to such suggested tips at all of its restaurants. A spokesman said the company will decide by year-end.

Texas Roadhouse Inc., which includes a tip of 15% for parties of eight or more at many of its more than 390 restaurants, is planning to phase out automatic gratuities by the end of the year, a spokesman said.

"I think the vast majority of restaurant owners will discontinue the practice," says Denise Wheeler, an employment attorney in Fort Myers, Fla., who represents several restaurant chains.

The change will complicate payroll accounting for restaurants that stick with automatic tips, because they will need to factor those tips into pay, meaning hourly pay rates—could vary day to day depending on how many large parties are served.

Restaurants are required to report to the IRS what its employees report receiving for tips and to pay Medicare and Social Security taxes on those amounts. Restaurants are eligible for an income-tax credit for some or all of those payments, but service charges aren't eligible, according to Marianna Dyson, a payroll tax attorney in Washington, D.C., who represents restaurant chains.

The change comes amid increasing costs and record-keeping requirements for restaurants. In January, restaurants with 50 or more full-time workers will be required to offer health coverage to employees working 30 or more hours a week, though penalties don't begin until 2015.

Restaurants adopted automatic gratuities to help ensure that their servers—whose tips supplement a salary that is often less than the federal minimum wage of $7.25 an hour—weren't stiffed on large tabs. But many servers are likely to support dropping the practice because they don't like the idea of their tips being treated as wages, which requires upfront withholding of federal taxes, and means they won't see that tip money until payday.

"I don't want my tips to be on my paycheck as a wage. I like to get my tips at the end of my shift because I know what I'm getting right away," says Tamie Cordoba, a 54-year-old server at a LongHorn Steakhouse in Jacksonville, Fla.

Ms. Cordoba makes base wages of $4.25 an hour, or $144.50 to $161.50 for her average workweek of 34 to 38 hours. She said she usually makes an additional $500 to $650 a week in tips. Since she never knows exactly how much she will get each week in tips, getting paid at the end of each shift helps her budget, Ms. Cordoba said. "In this industry, that's what we live on. If I had to wait two weeks I don't know how I'd survive."


The Cheesecake Factory Inc. suggests an 18% gratuity for parties of six or more, says a spokeswoman, but "We advise our guests that leaving a gratuity is always discretionary." She said the company is now reviewing its policy.

The IRS ruling was issued in 2012 to clarify and update earlier tax guidance on tips, which didn't spell out how automatic tips were to be treated. Restaurants persuaded the agency to delay implementation until next year.

In a statement, the IRS said it noticed an increase in the use of "auto-gratuities" and that it believed "additional clarification in this area would be in the best interest of tax administration."

The updated rule says the automatic tips are service charges because they aren't voluntary. In a question-and-answer section of the ruling, the IRS provided an example of a restaurant suggesting different tip amounts, and said that practice isn't subject to federal withholdings because the customer is still free to choose whether and how much to tip.

Still, the ruling has caused some confusion. Some restaurants insert an amount on the tip line and then remind guests on the check that they are free to adjust that amount up or down. Ms. Dyson, the payroll tax attorney, said that practice could come under scrutiny from the IRS. "How far can you go before the IRS says that looks like a service charge?" Ms. Dyson says.

====================

Technically, all servers, hairstylist, massage therapist, nail techs, bartenders, other tip earners are supposed to report all tips anyway. Most don't report all or even most of them. And while I'm not a fan of automatic tipping charges, I do understand why they exist.

For those who are living and supporting themselves/family with tips, will this new IRS rule hurt you? If you had to wait until payday to get your after tax tips, does that seriously hinder your earnings? If your restaurant were to eliminate automatic tip charges for large tables, do you think you'd still get as much or more from patrons anyway?

Angry about this new rule or much ado about nothing?





When the debate is lost, slander becomes the tool of the loser. Socrates
Monocle
Posted: Thursday, September 5, 2013 1:32:07 PM

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I'd rather have a restaurant (or other service-based business) ban tips and pay a living wage to begin with. I'd patronize a restaurant like that over an equal quality restaurant that doesn't, even if the menu were pricier.
Rembacher
Posted: Thursday, September 5, 2013 2:50:13 PM

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Joined: 10/16/2008
Posts: 1,107
I tend to tip 20-25% on good service, but if I've already been forced to give a lower tip by the restaurant, I will not make a second payment. So, waitstaff would most likely get more tips from me if the automatic tip practice was eliminated.

As for the policy itself, I have absolutely no problem with the IRS calling this a service charge. I don't see how it can be called anything but that. The restaurants are charging you extra for providing you service. I'm not sure that I would go as far as Monocle, and say that tips should be eliminated in favour of higher wages. Restaurants vary so much between their busy times and their slow times, that it would be hard to determine what that fair wage would be. Most likely it would benefit the waitstaff in slow times, but punish them in busy times. To me, I think increasing the minimum wage, while still allowing customers to reward good service on their own, is the best policy.
noll
Posted: Thursday, September 5, 2013 4:40:34 PM

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For a European like me the American concept of tipping seems absolutely absurd. In my mind it should be the restaurants' responsibility to pay a normal decent wage and not leave it up to the customers' will.

roymunson101
Posted: Saturday, September 7, 2013 6:40:18 PM

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Joined: 6/6/2011
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Location: United States
I have absolutely no issue with the IRS rule. While I feel for the servers that are just barely making ends meet for having to wait for their money, the amount of tax evasion in this country is absolutely incredible. I have to pay tax on all my income, why shouldn't the servers? Everyone complains about how high the income tax rates are in this country, but if everyone paid taxes on all their income the rates could be decreased dramatically.
Guest
Posted: Saturday, September 7, 2013 8:03:01 PM

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Joined: 12/1/2006
Posts: 779,317
So glad to read about the change in policy by these corporations with the new law coming in. Not necessary to make it tougher on the working class. Always tip your servers. And tip extra for top notch service. Why not? These are hard working people making your life a bit simpler.
LadyX
Posted: Sunday, September 8, 2013 8:01:49 AM

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I wish there was a way to increase IRS revenue without hurting the service workers, because this move surely will. The only reason restaurants had these mandatory tips in the first place was because customers regularly screw servers out of appropriate gratuities to begin with. At least the "6-8 parties" threshold kept them from getting screwed on a huge dollar amount.

This is a huge win for the "treats servers like subhumans/resents having to tip decently" crowd. And also the IRS, I suppose. So glad to help them out any way I can.
Monocle
Posted: Sunday, September 8, 2013 8:43:26 AM

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The only reason customers even have the power to screw service workers with inappropriate gratuities is because restaurants already screw them by not paying them living wages. If they could make a decent living without tips, then a gratuity is _actually_ a gratuity in stead of an essential component of income, and receiving one is a bonus, whereas not receiving one doesn't hurt you.

If a gratuity is actually essential to day to day living, it isn't a tip. It's the customer subsidizing the restaurant for paying inadequate salary.
roymunson101
Posted: Sunday, September 8, 2013 12:15:36 PM

Rank: General Zod

Joined: 6/6/2011
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Location: United States
LadyX wrote:
I wish there was a way to increase IRS revenue without hurting the service workers, because this move surely will. The only reason restaurants had these mandatory tips in the first place was because customers regularly screw servers out of appropriate gratuities to begin with. At least the "6-8 parties" threshold kept them from getting screwed on a huge dollar amount.

This is a huge win for the "treats servers like subhumans/resents having to tip decently" crowd. And also the IRS, I suppose. So glad to help them out any way I can.


There is a way the IRS could increase revenue without hurting service workers. They could eliminate the special tax treatment for qualified dividends and long term capital gains, but most members of congress have refused to let that lapse or vote to repeal it. I'm fairly sure that most service workers don't enjoy the benefit of those special tax treatments.
sprite
Posted: Sunday, September 8, 2013 9:04:27 PM

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Hi, my name is Rachel, and i am a waitress. i've been doing this, off and on, mostly on, since i was 16. a lot of jobs i've worked, i pretty much lived on tips - what i was making on my paychecks wasn't enough to put food on the table, let alone pay rent. right now, i'm lucky - i'm working for a good joint that pays fair wages. most in my profession aren't so lucky. i'm not sure how this is going to effect me yet, obviously, but i'm guessing that it's probably going to effect most of us negatively. i've seen both sides of tipping - the really generous ones and the ones who really just screw you - sadly, the ones who screw you are the ones that require the most work and some go out of there way to do it. i have a lot of tales about really messed up customers, stuff that would make most of you go, wtf, seriously? it's not an easy job, either. sometimes you don't take breaks, you work straight through for 10-12 hours, and yet, you keep being cheery and helpful and take care of people, some of who are drunk, some of who have bratty kids, etc, hoping to get a little bit extra on the table. yeah, if restaurants paid a decent wage, that would be great, but i don't believe this change is going to push them into doing it.

My 2 cents



Love not hate.
Guest
Posted: Monday, September 9, 2013 12:11:50 AM

Rank: Lurker

Joined: 12/1/2006
Posts: 779,317
Monocle wrote:
The only reason customers even have the power to screw service workers with inappropriate gratuities is because restaurants already screw them by not paying them living wages. If they could make a decent living without tips, then a gratuity is _actually_ a gratuity in stead of an essential component of income, and receiving one is a bonus, whereas not receiving one doesn't hurt you.

If a gratuity is actually essential to day to day living, it isn't a tip. It's the customer subsidizing the restaurant for paying inadequate salary.


I totally agree to this.
Ruthie
Posted: Monday, September 9, 2013 2:06:28 PM

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I'd be fine if restaurants added an automatic gratuity, as long as the money went to the servers. People who wanted to could leave cash on the table for especially good service, and it would eliminate stiffing the wait staff. If they wanted to raise their prices by fifteen or twenty percent and give that money to the waitresses that would be fine with me too. It really isn't fair that restaurants should cut out the added on gratuity to large groups though. The people who wait tables with big groups are the ones most hurt when the tips are measly.
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