What is in this article?:
- How IRS rule change on automatic tips could impact restaurants
- What operators can do
With the new year came new rules that may change how restaurants handle gratuities.
Joseph Henchman, vice president of legal and state projects at Tax Foundation
With the new year came new Internal Revenue Service rules on automatic gratuities that may change how restaurants handle tips for large parties.
The IRS’ revised Ruling 2012-18 draws a sharper distinction between tips and service charges. Many restaurants for years have added fixed gratuities to parties of five or more, but the new IRS rules on what constitutes a tip require restaurant owners to treat them as service charges, which are a part of wages.
Joseph Henchman, vice president of legal and state projects at Washington, D.C.-based think tank Tax Foundation, said that “in order for it to be a tip, it has to be voluntary; it has to be entirely set by the customer; it has to be the subject of something the customer comes up and not dictated by a policy; and the customer has to decided who gets the tip.”
Henchman noted that getting around the automatic-gratuity rule would be difficult for any restaurant operator. “It’s going to be hard to avoid all four of those things,” he said in an interview.
Other critics have said the change will complicate payroll accounting. While both wages and tips are taxable, tips are often reported and cashed out that day while wages must go through the payroll process.
“It’s certainly a change in how things have been done. It’s the tail end of a lot of changes that have happened in reporting tips over the years,” said Henchman. “The IRS needs to hear how their rule changes are affecting real business owners. I certainly hope anyone with stories pro or con on these changes will make them heard.”
Darden Restaurant Inc.’s Olive Garden and Red Lobster brands have already reportedly tested getting rid of the automatic gratuity. Henchman also said he knows of one restaurant company that is putting “suggested amounts” for tips on larger-party receipts.
Henchman, who also serves as The Tax Foundation’s vice president of operations, discussed the rule change with Nation’s Restaurant News.
How will the rule change impact restaurants?
Right now a lot of restaurants will automatically put a gratuity on for large parties in order to make sure their staffs are willing to work those large groups without the fear of being under-tipped. Unfortunately, the administrative change that the IRS is going to require with this new revenue ruling makes [automatic gratuities] a lot less appealing for restaurant owners and wait staff. We’ll probably see those go away. I would imagine it would become harder to find wait staff to work large parties.