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
What operators can do
What led to this rule change?
The IRS, for a long time, has been trying to crack down on the under-reporting of tip income. Back in the day, of course, if you were a waiter or waitress, you wanted to make sure you got your tips in cash and you didn’t report them and just pocketed them. That’s all kind of gone now with credit cards; there is a lot of better reporting and better tracking. The IRS has had more stringent reporting requirements. People need to report their tips frequently, and taxes need to be withheld from them. This is just the next step for the IRS in the effort of theirs.
I would argue that they have already kind of solved the problem, and now they are just looking to keep doing things. I don’t think this will flesh out any under-reported tip income that their previous efforts haven’t already achieved.
What effect will the change have on restaurant operations?
The big change, of course, is that any service charge of this type has to go through the payroll process. You can’t cash out your servers that day. Instead, it has to go into payroll, and taxes need to be withheld at that time and you need to sort it out with hourly wages. That can all get pretty complicated.
It’s going to be a headache but maybe not that much additional headache, although it will be a problem to the servers who are used to taking their tips home the day that they earn them rather than maybe two weeks later when it goes through payroll.
If you are a large restaurant company, you probably already have this infrastructure. For smaller restaurants, maybe you don’t have this infrastructure and maybe it’s a lot hard to do this kind of thing.
What advice do you have for restaurant operators regarding this policy change?
Probably the best thing is to talk with your wait staff. Let them know that this change is taking effect and that it’s coming from the IRS and not from you. And get their input on what the best solution might be going forward.
What are those solutions?
The choices are: how important is it that they take their tips home that night, which is usually pretty important for wait staff, vs. having to go through the payroll process and divvy it out that way. Weigh that against being under-tipped for large parties, which is a big problem.
What are some ways restaurants can urge patrons to add a gratuity?
There are ways to gently encourage patrons: don’t forget to tip your wait staff. As the IRS says, you can’t require it now, as it’s no longer a tip — it’s a service charge.