Weather permitting, restaurants across the country will be packed tonight with couples out for a romantic Valentine’s Day dinner, a meal that often includes wine, fancy food and generous tipping at the end. Those tips aren’t affected by an IRS rule change that took effect last month, but bigger parties that trigger a restaurant’s automatic gratuity policy have brought big changes for servers and their bosses with the IRS’s new tipping rule.
On Jan. 1, the Internal Revenue Service began requiring restaurants to treat the automatic 15% to 20% gratuities that many charge on parties of six or more as taxable revenue instead of tips. For servers, that means waiting until payday for their portion, which will be taxed just like their base pay.
“Tips and service charges are customary within the industry, and clarity and consistency in the treatment of tips and service charges is important for employers, employees and patrons,” said Katie Laning Niebaum, a spokeswoman for the National Restaurant Association.
The tradition of tacking on the gratuity, typically 18%, began as a way to guarantee that servers who handled big parties were compensated accordingly, but the IRS says there’s a difference between tips that are offered or even suggested and those that are required, and in 2012, the agency clarified that those that are required come under the category of service fees.
In a June 2012 bulletin, the IRS spelled out the conditions that make a tip a tip and not a service fee: “(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.”
With tips, servers take home the cash the same day and are required to report the tips as income when they file their income taxes. Just as with regular wages, employers are required to pay social security and Medicare taxes on the cash tips their workers take home, based on the amount of tips the worker reports to the company each month.
The IRS made the ruling in 2012, but it gave restaurants until this year to prepare. Last year, ahead of the change, Olive Garden and Red Lobster parent Darden Restaurants dropped the automatic gratuities at 100 restaurants in a four-state test, the Wall Street Journal reported, and in December the company announced it would do away with the practice entirely as of Jan. 6, according to the Orlando Sentinel. Darden’s restaurants replaced the gratuity with suggested tip amounts. Other eateries including Smokey Bones Bar and Fire Grill and Tony Roma’s also discontinued the practice, the paper reported.
Some restaurants will continue to collect the fee and follow the new reporting rules, and others will likely suggest a gratuity, but in reality the change could mean less pay for servers if big groups of diners decide not to tip much, or worse, stiff the server completely.
Do you tack on a gratuity for big parties? Have you changed your policy? Tell us about it in the comments.