Well, not so fast. There’s more to it than that. It’s not a done deal that this unsavory practice will automatically go away. Let me set the stage. You’re out to eat with a group of friends, let’s say there are seven of you. You see a note on the menu that an 18% gratuity will be added to your bill for parties of 5 or more. Don’t you just hate that? I do, especially when the quality of the service didn’t warrant 18%. Well, there is apparently a remedy, thanks to the Internal Revenue Service (IRS).
Just to be clear, I’m not against tipping. I’m actually a better than average tipper. Several times I had to argue with a server who thought I had given too much. I feel that if the service is exemplary, the server needs to be rewarded. The mean minimum wage for wait staff is only about $3.25 per hour. So, they’re getting paid mainly from tips more so than from their paycheck.
The Internal Revenue Service has issued a change in the way gratuities are applied, making it less advantageous for restaurants to continue doing so. Although the new ruling was promulgated in June, 2012, restaurants weren’t required to begin to follow it until January, 2014, but some began doing so right away. The IRS recognized that some restaurants, especially some smaller places lacking sophisticated payroll systems that the larger restaurants use. So, there was a grandfather clause allowing them all to continue with the practice for another 18 months. The ruling has determined that a mandatory, automatic tip is not a gratuity. Such a mandate for patrons, as stated by the IRS, is more of a service fee and once the restaurant passes it to the employee, it become wages for FICA tax purposes.
That won’t mean they’re going away. But it changes how the server will be paid and gives an added tax burden on the employer. It’s more burdensome because this “change would mean more paperwork and added costs for the restaurants—and a potential financial hit for waiters and waitresses who live on their tips but don’t always report them fully.” This is big news in my opinion. I don’t like them requiring a particular amount. I love this change, not because I am against giving a big tip, but rather, because I don’t want to be told how much I should tip.
The new ruling, 2012-18, was a modification and revision of ruling 59-252, held that tips received by in the course of the servers employment are considered remuneration and the employer is legally bound to assess the appropriate FICA taxes. Some of those who work in the restaurant industry won’t like this change. Obviously the restaurant management won’t like it because it will be an added administrative burden.
The restaurants actually are not required to stop assessing the mandatory gratuity; however, those that don’t will take a financial hit through added taxes. If that happens, we know those added costs will be passed on to the customers, reflected in higher prices. C’est la vie!