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Did the IRS Just Kill the Automatic 18-Percent Tip for Big Parties?

Somone left a tip, right?
Somone left a tip, right?

The Wall Street Journal has an interesting article today about a new IRS tax rule that could affect your next large celebratory dinner. It has to do with automatic gratuity charged for large parties at restaurants. You know the asterisk at the bottom of the menu in 10-point font:

(*18-percent gratuity added to parties of 8 or more.)

In theory it's a way to ensure that servers who work for below minimum wage rates don't get hosed after a long dinner session. But in the aftermath are a lot of issues -- some legal, like tax reporting, and other personal, like diners not inclined pay the amount, or sometimes, double paying a tip, not realizing it was already added.

Regardless, the new law puts restaurant owners and operators between a rock and a tax hit. Staring January 1 2014, every time this "service charge," as it's now categorized, is added to a check, the money is subject to payroll tax withholding. For servers that typically walk to their car with a roll of cash in their pocket, this particular "service charge" will show up on their paycheck instead. Then, as far as reporting procedures? Well, that income has now been tagged.

We reached out to several Dallas restaurateurs today, all who were curiously silent on the issue. Perhaps they too are pondering what this means for the books in 2014 and their very important front-of-house staff.

For the technicalities, the IRS says the absence of any of the factors below indicates that gratuity may be a service charge:

(1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment. All of the surrounding facts and circumstances must be considered.

Julie Jargon, who wrote the piece for the WSJ, reported that Darden Restaurants, which owns Olive Garden, Red Lobster and Eddie V's, is trying a new system where they suggest a tip amount on bills, which punches a hole in the four-point guideline above.


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