IRS to change rules around tips

Posted at 9:54 PM, Sep 10, 2013
and last updated 2013-09-10 23:54:41-04

A new IRS rule could change the way restaurants do automatic gratuities. The rule, which takes effect in January, will consider the tips to be a taxable wage.

“To walk out of here with no money in your pocket is tough to swallow,” said Joshua West, a server and bartender at Squatters Pub in Salt Lake City.

The restaurant allows servers to choose whether or not to add on an automatic gratuity of 18% to a bill for parties of eight or more. However, because the rule would require the tips to go straight into their paycheck, many may opt out.

“Here in Utah, servers are only paid $2.13 an hour,” said server Jake Tucker. “That already doesn’t cover our taxes at the end of the year. We owe a lot of taxes. So, in one sense it will help with that, but it will also make it so that when we come in and work to make that money, it’s going to be a lot harder to make it day to day.”

Starting in January, the automatic tips at restaurants will be viewed as service charges, since the customer is required to pay it.

“The change in that law, I don’t see the purpose for it,” said Miranda Girardi, assistant general manager at Stoneground in downtown Salt Lake. “They are still reporting those tips. They are still getting taxed for it. It’s just kind of rearranging the way they’re getting taxed for it.”

According to Girardi, the rule could affect how their customers are billed.

“We may change it so that larger parties are getting an automatic gratuity, you know, parties of 10, 12 or more,” she said.

The requirement has already prompted the company Dardens Inc., which owns chains like the Olive Garden, to do away with automatic tipping at certain locations as a test, according to a spokesman. At 100 restaurants around the country, the company is instead offering customers an option tip amount.

“In a lot of ways, I think it will be beneficial for everyone involved, especially the servers, in the end, because they won’t have a tax bill at the end of the year that they won’t see coming. It’ll all be taken out up front,” said Matthew Lake, executive chef and owner at ZY Food Wine & Cheese.

The rule technically went into effect in 2012, but the IRS delayed enforcing it until January of 2014 to give restaurants a chance to comply.

“Say you come in to work one of those shifts where you’re taking nothing but large parties, you’re kind of coming to work for free in a sense,” West said.