IRS Automatic Gratuity Rules Now in Effect

The IRS has made a few changes concerning tips andhow tips are reported for the purpose of taxes. Thesenew guidelines state four conditions that must be present in order for customer payments to be classified as tips.

  1. Tips must be voluntary rather than compulsory.
  2. Customers must determine the amount of the tip.
  3. Employer policy cannot dictate the tip.
  4. Customers determine who receives the tip.

The Pros and Cons of the New Policy

There are people on both sides of the issue and feelings are strong either way. The problem is that some U.S. states continue to pay tipped employees considerably below the standard federal minimum wage. In fact, while regular minimum wages have increased steadily over the past two decades, minimum wage for tipped employees has remained$2.13 per hour since 1991.

Those wages in 1994 dollars is worth about $1.25 in today’s economy. This means that servers earning the same wages for their work have about half the spending power those same wages once provided.

Some feel this new rule by the IRS might be an attempt to push state and federal government officials to finally raise the minimum wage for tipped employees. While minimum wage continues to be a political ticking time bomb for people on both sides of the issue, much is being lost in the hyperbole on the sides of restaurant owners vs consumers, there is one critical fact small business restaurant owners should consider before deciding to change policies on automatic gratuities.

The IRS is not saying that you can’t charge automatic gratuities to customers. The change is not in your ability to do so. It’s in how you report the “tip” if you choose to do so that has changed.

They have simply changed the way you can report them. They must not be considered service charges rather than tips making them subject to regulations regarding wage withholdings. Servers would also not be able to bring those tips home at the end of their shifts either.

Options for Restaurants

Most restaurant owners understand that servers are the faces of their restaurants. They needs those faces to be smiling, happy, and content in their positions. For this reason, you want them to enjoy their jobs and feel as though they’re earning livable wages.

One option restaurants are taking up is the ability to include a recommended tip. As long as the recommended tip doesn’t fall on the tip line or appear to be a required tip amount, the IRS finds that acceptable. The difference is that you are recommending the amount rather than requiring it or charging it automatically.

Make sure to discuss the implications of any changes with a tax professional before making changes that could impact the livelihood of your servers or your restaurant’s bottom line. Be sure you’re also property protected with adequate restaurant insurance.