Attention Waiters & Waitresses: The IRS is Coming After Your Tips!

If you are a waiter or a waitress, or if you’ve got friends or family members that are, you know how important tips are. Most waiters and waitresses are paid a very low hourly rate, significantly less than minimum wage, and consequently are dependent on tips and gratuities to make a living. Until now, tips and gratuities were not considered income for payroll purposes, which meant that a portion did not have to be withheld for payroll taxes.

Now, however, the IRS is changing the rule. Automatic gratuities, often assessed for larger parties, will now be treated as regular income.

For waiters, this means that a portion of the income will be withheld automatically, and that the income will be reported by the restaurant to the IRS.

For restaurants, this means additional paperwork and additional layers of complexity. The Wall Street Journal reports:

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., DRI +1.15% 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.

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.

The fact that the IRS is further expanding their authority and making life more difficult for business owners is no surprise at this point. Unfortunately, this policy will have an impact on millions of waiters and waitresses across the country, many of whom don’t make a great living and look forward to taking their tips home, in full and in cash, at the end of a day’s work.

As the IRS makes life more complicated for business owners, it becomes easier than ever to make a mistake and end up in “hot water” with the agency. Should you find yourself or your business engaged in an IRS dispute, we can help. Contact us today to learn more!