Friday, September 6, 2013
Wall Street Journal, IRS Rule Leads Restaurants 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 IRS 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. ... "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 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
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.