The End of "Automatic Gratuity"

You know the restaurants that have "18% gratuity automatically added to groups of 8 or more" plastered all over their menu. Many of us have been to a restaurant or have paid the bill at a restaurant where a gratuity was automatically included. And many of us have paid 18% gratuity or more towards what we felt may have been an unsatisfactory experience. Well, those days are presumably over.

At the beginning of this year, the IRS came up with Revenue Ruling 2012-18. The ruling states that automatic gratuities will, going forward, be considered as service charges which would be considered income for a restaurant. Further, if those automatic gratuities would be passed along to an employee, they shall be considered wages and not tips.... essentially altering the tax payment scale of traditional restaurant accounting methods. Instead of the server paying taxes on their tips, the restaurant will be paying taxes on dispersed wages.

The thought process here from the IRS is that servers do not claim all of the gratuities as income, therefore the IRS is not receiving all of their tax dollars. So, if they can turn those automatic gratuities into a restaurants income, then they would surely receive their tax dollars. It would be very hard for the IRS to audit a server whose way of life might possibly be through tips only. How do you prove exactly what he or she has made through the years? Conversely, as a server, you better keep accurate records of what it is you made and when, because if they come knocking, it would be a very difficult process without accurate record-keeping of your gratuities.

With all that said, it may not be as big of a deal now, as say 15-20 years ago when we were much more of a cash society. As an example, about 70% or more of our payment receipts are credit card or house account related. Meaning, those gratuities are rung through our Point of Sale System which is linked directly to our payroll system. Essentially, every dollar of gratuity is claimed automatically for the server on those charges. The server has no control over that. The 30% of sales receipts that are closed to cash, that's the 30% the IRS is rightfully after because they don't know how much was left for a gratuity. The server is required legally to report that gratuity.

Fortunately for us, this will not change much of what we do from a gratuity standpoint. We never have had the notation on our menu about automatic gratuity. We have always told our staff that at the completion of a meal they need to get their supervisor and ask if they can add their gratuity. If something went wrong, they were told no. The incentive to give quality service is the end result. If a server already knows the end result, what incentive do they have?

The IRS has this one right. Gratuity should never be automatic.  It should be earned and explicitly the right of the customer to decide how much that service was worth.