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New IRS Rules Creates a Lose-Lose Situation for Restaurants Dealing With Automatic Gratuity

I have some no bueno news (c/o Iris McCallister) to share. If you’ve ever been a server/still are a server at a restaurant, you’re going to be pissed. Last week, the Wall Street Journal reported that the Internal Revenue Service has updated a tax rule that will change how a lot of dining businesses are run.

Starting in January, the Internal Revenue Service 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.

As a customer, I’ve always appreciated the automatic gratuity placed on my tab when I’ve sat with a large group. This practice ensures that cheapskates don’t get to leave without tipping the proper amount. But now, with this new rule, some restaurants are dropping the automatic tip. Instead of servers getting to take home their tips at the end of the night, the new rule means that “tips [will be] treated as wages, which requires upfront withholding of federal taxes, and means they won’t see that tip money until payday.”

Well, crap.

For restaurants that do keep automatic tip, “the change will complicate payroll accounting for restaurants that stick with automatic tips, because they will need to factor those tips into pay, meaning hourly pay rates—could vary day to day depending on how many large parties are served.”

It’s definitely a sucky situation for restaurants and servers both.