Starting January 2014, an updated IRS Tax ruling from 2012 will force restaurants to reclassify automatic large party group tips as regular wages, subject to payroll tax withholding. This could result in added costs and administrative paperwork for restaurants, a potential financial hit for waiters and waitresses who live on their tips, and possibly impact service levels for customers.
Will this affect automatic tipping? Absolutely.
The new tax ruling reclassifies automatic gratuities as a service charge instead of a standard tip. The tip is treated like a regular wage; restaurants are subject to withhold payroll tax, and servers have to declare that money.
Darden Restaurants, who owns 2,100 restaurants across the country, is testing the elimination of an automatic 18% tip on bills of 8 or more people. It is trying out a new system at about 100 restaurants that suggest 15, 18 or 20% tips on all bills, regardless of size. This change means that customers will get to decide how much they tip instead of a flat amount.
In my conversations with independent restaurant owners, many of them are likely to follow suit and eliminate automatic tipping given the additional record-keeping and payroll costs.
Will this affect 2.3 million waiters and waitresses working in the US? Likely.
Tips to wait-staff are a critical supplement to their salary, which oftentimes is less than the federal minimum wage of $7.25 per hour and sometimes as low as the “tipped minimum wage” of $2.13 per hour set by Congress in 1991. The National Restaurant Association says that most servers earn well above the federal minimum wage of $7.25 per hour when tips are included.
For the server, if the restaurant continues with an automatic group tip, it means that servers will receive less cash at the end of the workday. In addition, servers will likely have to pay more taxes year-end.as group tips will likely be reported.
If restaurants do indeed eliminate the automatic tip, the tip amount is at the whim of the customer. In some cases, tips may be less than 15%-20%, and service staff might feel short-changed.
On the other hand, one server says, “ I have been a server for 25 plus years and can honestly say I get a better tip when no gratuity is added.”
Will this affect the customer? Possibly.
The institution of tipping servers is a complex one. In many countries tipping is not the norm and sometimes frowned upon. In the US tipping is common practice. Americans have embraced tipping because it seems positive to all parties. Servers make good money, much of it cash and much of that unreported on tax returns. Restaurant owners save on labor costs and payroll taxes. Customers generally believe that bigger tips bring better service.
Hopefully, this IRS ruling does not lead to a decrease in US service levels. Having said that, it is important to recognize that tips really are a part of a server’s wage, and not just a bonus. As a customer, be cognizant of the challenges of serving large parties and your tip should reflect those challenges.
While there are many arguments for and against tipping from a customer’s point of view, I have to speak from my brief experience in the service industry. Treat your wait-staff how you want to be treated. These men and women work really hard for your tips. Yes, they can make a lot on a busy weekend, but not always. How much tip would you want to receive if you were in their shoes?