Automatic Gratuities are Now Handled as Wages by the IRS. What Does this Mean for the Restaurant Industry?

Everyone is familiar with tipping the wait-staff when receiving table service at a restaurant. It is also not uncommon to have those tips added automatically when going to the restaurant with a large group. However, there are some changes in how the IRS is having restaurants declare automatic gratuities that may end up curtailing the practice.

Starting in January 2014, automatic gratuities added to a table’s bill will be treated as a service charge and not a tip. The reason? Tips are defined as something given without compulsion and that the customer must have an “unrestricted right to determine the amount”. Therefore, an automatic charge put on the customer’s bill does not fall under the definition of a “tip”.

According to the Wall Street Journal, “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.”

If you are working in the restaurant industry make sure you and your tax preparer are up to date on this latest IRS rule. To learn more about the change to automatic gratuities you can read this article provided by NPR.

http://www.npr.org/blogs/thetwo-way/2013/09/05/219290573/irs-to-count-automatic-gratuities-as-wages-not-tips