IRS rule change for restaurants | The Compost Bin | Forums

lol, I just found out about this today, shows how much I pay attention

In June, 2012, the IRS issued Rev. Rul. 2012-18 (http://www.irs.gov/i...../ar07.html) which states that automatic gratuities in the hospitality industry (for example, an automatic 18% tip for parties of six or more) will be treated by the IRS as service charges rather than tips. Unlike optional tips which the employee bears the responsibility of reporting, these service charges will be viewed as wages and the employer will be responsible for reporting them. Additionally, employers should be aware that any such service charges will be considered part of the employee’s regular rate of pay for purposes of calculating the weighted average overtime rate.

Per the IRS, in order for a payment to be treated as a tip, generally all of the following factors must be met:

1) The payment must be made free of compulsion;

2) The customer must have the unrestricted right to determine the amount of the payment;

3) The payment may not be dictated by employer policy or be the subject of negotiation; and

4) Generally the customer must have the right to determine who gets the payment.

If any of these factors cannot be satisfied, the payment is likely a service charge, not a tip.

Based on feedback received from the hospitality industry, the IRS extended the implementation deadline for the above treatment to January 1, 2014.

We recommend that our hospitality industry clients review their gratuity policies as well as their reporting and recordkeeping practices to ensure compliance with this rule. Many restaurants have decided to eliminate the practice of charging automatic gratuities due to the extra work involved. Treatment as service charges could also potentially reduce the amount of FICA Tip Credit, but we encourage you to consult your tax advisor for specifics.

Please contact your Payroll Specialist if you have any questions or need to establish a service charge earning code should you choose to continue using automatic gratuities.

Personally I think it's a dumb policy for a restaurant to have, I think restaurants that have the policy in place shoot themselves in the foot with it. I do take exception to the IRS putting the tax burden and income on the owner though. The reason why is because the thought that servers are not claiming 100 percent of their tips, it's easier to track the owner than the servers.

So dining tip of the day, if you go out to eat and the establishment wants to charge you a automatic gratuity, drop some knowledge on them that it is now a service charge and is considered income, I think you'll see it come off your bill with a quickness, heck print this out and stick it in your wallet.