IRS Automatic Gratuity Law Changes your Restaurant Tip Policy

Are you aware of the new laws regarding tip reporting?

Effective January 1st. 2014, the Revenue ruling 2012-18 is dramatically effecting service charges or automatically applied tips! And from the people I spoke with, the IRS is going to be getting VERY serious about enforcing these new tipping policies!

An automatic gratuity is when you add something like 18% for parties of 8 or more. It doesn’t make it illegal, it just can’t be cashed out to take advantage of the FICA Tip Credit (The 45b Credit). It’s now considered a service charge, not a tip and it needs to be reported as wages. Meaning you need to pay Social Security, Medicare and Unemployment Tax on it!

This is somewhat easy to fix, you can just eliminate your automatic tip policy on large groups!

The bigger problem is when tips are collected through banquet and catering events.

It get’s even a little more confusing because these service charges, that now are considered wages, can effect overtime calculations. WOW!!!

IMPORTANT: These are just suggestions from my research, I am not offering you legal advice and I am not licensed or trained in tax laws. You definitely need to run this advice by your accountant or lawyer!

What is the solution? Here are a few options, but you and your staff are not going to like any of them!

Indicate a “suggested gratuity” on the customer’s receipt, but do not add it to the total on the receipt allowing the customer to designate the gratuity voluntarily. You can set your POS to print suggested tips…(as long as the tip line is left blank for the customer to fill out at their own discretion).

Add any appropriate service charges to your employees payroll as wages in the form of bonus or commission.

Charge sales tax on all service charges, regardless of the amount paid to the employee

Consult with your tax advisor or attorney to determine the proper method of taxing service charges and paying your employees

If you have already set up some new systems, to deal with this in your restaurant, please share them in the comment box below!

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