Restaurants could drop automatic tips

We’ve all been to restaurants before when we have been surprised by the “automatic gratuity” added onto the check. This is common practice at most restaurants whenever there is a large party. But there are several problems that come along with it. Maybe you didn’t think the service was worth that much of a tip (not that One Fat Frog condones undertipping). Conversely, maybe you would have left a bigger tip if the decision had been left to you.

Now a recent IRS ruling is shaking up the practice and it could result in many restaurants dropping automatic tips entirely. The IRS recently ruled that automatic tips will now be considered service charges rather than tips. The ruling could be a way of dealing with the problem of restaurant servers not fully reporting tips to the IRS. (The Frog says it’s never a good idea to try to trick the IRS).

That means the restaurant servers will no longer have to report it as additional income, but it also means that the restaurants will have to include that gratuity in their payroll,  making it part of the servers’ wages. That means more paperwork, more accounting, and possibly lower base pay for the servers. Another downside for restaurants is that they would lose the income tax credit, for which the service charges are not eligible. The automatic gratuities will also be subject to payroll tax and will be withheld until the servers’ paycheck.

As the changes will have a negative impact on both the restaurants and the servers, many restaurants will likely opt to drop the practice altogether, leaving tips for large parties up to the whim of the diners. Whether this will on average increase or decrease the tip for servers remains to be seen. The new IRS ruling will take effect January 1, 2014. One Fat Frog: your source for restaurant related news and politics since 2005.