Have you ever gone out to eat with a large group of friends and noticed that when the bill arrives, the tip has already been included? As a former restaurant worker, I can tell you the first number that comes to mind when you hear ‘group of 8 or more’ is 18. In Massachusetts, 18% is the maximum tip employees can automatically add to restaurant tabs of 8 people or more. Currently, automatic gratuities, as well as normal tips, are to be claimed as income by each individual employee. The IRS defines a gratuity as an amount that must be determined by the consumer (not the restaurant).
However, new policy set in place by the IRS has caused restaurant chains to rethink their current automatic gratuity policies. Beginning January 1, 2014 automatic gratuities will be considered regular wages, and therefore will be subject to payroll tax withholding. Not only could this be potentially detrimental to the workers income, but this will also require more paperwork and added costs from the employer.
Another hurdle that would need to be cleared due to this new policy is how employers would monitor over-time pay. Hourly wages would vary day to day, based upon how many large parties (and automatic gratuities) each employee had that day, making it nearly impossible to manage over-time hours.
While tipping is NOT mandatory in this country, it is expected in most service industries. Many restaurant workers shy away from automatic gratuities because they tend to receive more than 18% as a tip. According to a study done by Zagat, the average American tips 19.1%, which is up from the average 10 years ago which was 18.3%. One way restaurant employers are successfully navigating this dilemma is by printing a ‘suggested tip’ amount on the bottom of a customer’s bill. This makes the customer conscious of what an appropriate tip would be, while avoiding additional tax issues by adding the gratuity automatically.
Undoubtedly, there will be both positive and negative feedback as a result of this ruling. However, during a time when employers are already being forced to focus on compliance issues due to the Affordable Care Act, any additional tax requirements may prove to be quite the payroll headache.