If you are a restaurateur or a server, you need to pay attention. After you watch the protesting-doing-math-at the-table clip from Curb Your Enthusiasm video, you need to do some math homework. Starting January 1, 2014, the IRS is going to start enforcing a law that has been in place for a while. Like most laws, it sounds sexy: Tax Treatment of Mandatory Gratuities.
Here’s the short version: If you automatically add a gratuity of 18 percent or higher on parties of six or more, the money collected will be treated as a service charge which, in turn, is considered restaurant income. And if said charge is distributed to service staff, it is considered wages, not tips.
A service charge is an amount automatically added to a customer’s bill by management. The IRS lists four factors, all of which must be present in order for the customer’s extra payment to be deemed a tip and not a service charge:
1. The customer’s payment must be made free from compulsion;
2. The customer must have the unrestricted right to determine the amount;
3. The payment should not be the subject of negotiation or dictated by the employer policy;
4. And, generally, the customer has the right to determine who receives the payment.