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New tax rule will have restaurants rethinking 'automatic tips'

By Catholic Online (NEWS CONSORTIUM)
September 19th, 2013
Catholic Online (

Some restaurants acutely aware of some customers who bolt outside without leaving a tip for the server have initiated the policy of "automatic gratuities." These take the form of a 15 to 18 percent fee added to the check, to compensate the server who usually works for minimum wage. Now - a new tax law may make these automatic gratuities more trouble than they are worth.

LOS ANGELES, CA (Catholic Online) - Beginning in January of next year, the Internal Revenue Service will start classifying those automatic gratuities as service charges. In other words, these gratuities will be treated as regular wages, subject to payroll tax withholding. This is different from the traditional tips, which restaurants leave up to the servers to report as income.

This policy change will lead to more paperwork and added costs for the restaurants. This also poses a potential financial hit for waiters and waitresses who live on their tips - but don't always truthfully report.

Olive Garden, LongHorn Steakhouse and Red Lobster restaurants have long included automatic 18 percent tips on the bill for parties of eight or more at its more than 2,100 restaurants. These restaurant chains are now considering eliminating them because of the IRS ruling.

The Darden restaurant chain in July stopped automatic tips at 100 restaurants in four cities, where it tested a new system in which the restaurants include three suggested tip amounts, calculating for the customer the total with a 15 percent, 18 percent or 20 percent tip on all bills, regardless of party size. 

Therefore, diners can opt to tip more or less than the suggested amounts - or not tip at all. Depending on how patrons react and how well the new software system works, Darden may switch to such suggested tips at all of its restaurants. 

Texas Roadhouse Inc., another restaurant chain which includes a tip of 15 percent for parties of eight or more at many of its more than 390 restaurants, is planning to phase out automatic gratuities by the end of the year.

"I think the vast majority of restaurant owners will discontinue the practice," Denise Wheeler, an employment attorney in Fort Myers, Florida, who represents several restaurant chains.

The change complicates payroll accounting for restaurants that stick with automatic tips. These businesses will need to factor those tips into pay, meaning hourly pay rates, which could vary day to day depending on how many large parties are served.

The message is: If you can't afford to tip, don't go to restaurants. Be nice to your server - the little bit you leave on the table could make a world of difference to them and their families.

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