Hundreds of Texas restaurants could be forced to tweak the way they calculate tips for large groups when the Internal Revenue Service starts enforcing a new rule in 2014. Eateries around the country have long added automatic gratuities to the bills of large groups of diners, but the IRS’s move to reclassify such fees may prompt nearly all such restaurants to reconsider that practice. While the tactic ensures that waitstaff receive fair tips for serving big groups, the new rule views those payments as wages rather than tips and thus subjects them to payroll taxes.
Experts say the new rule could significantly raise taxes for both Texas restaurants and the servers they employ if they continue listing automatic gratuities on customers’ receipts, which would likely cause such businesses to quickly drop the practice and handle tips for large groups no differently than for individual diners. This could also increase the likelihood of tax litigation for businesses that fail to properly adapt to the new rule.
Several restaurants, including over 100 locations operated by Darden Restaurants, have already stopped listing automatic gratuity in favor of print suggested tips on patrons’ bills. It plans on assessing the new practice to determine whether it will drop its automatic 18 percent gratuity policy at its over 2,100 national locations. “We’re testing this change in an effort to determine the best way to preserve tips for our employees while following IRS guidance,” explained a representative for the restaurant chain.
According to IRS officials, the change should theoretically impose a “negligible” payroll tax burden on companies that continue to charge automatic gratuity. However, a spokesperson with the agency noted that taxes would indeed rise for establishments where servers are under-reporting their tips.
Even small changes to IRS policy can potentially create large disturbances for small Texas businesses. The experience and knowledge offered by a quality tax law attorney is priceless for the owners of such businesses, allowing them to make educated decisions and adopt company policies that allow them to best negotiate the often complicated tax system.
Pittsburgh Post-Gazette, “IRS ruling may take gratuities off the menu” Patricia Sabatini, Sep. 08, 2013