How the IRS Automatic Gratuity Ruling Impacts Restaurants and Employees

November 14, 2013 Written by

This is a followup to an earlier article posted regarding this subject.

Beginning in January 2014, the Internal Revenue Service will classify an automatic gratuity—the policy of adding an automatic tip to the bills of large parties of diners—as a service charge instead of a tip. The IRS regards service charges as regular wages, which must be reported for payroll tax withholding.

The IRS ruling on automatic gratuities isn’t actually new, having been issued in June 2012 as part of an effort to update earlier tax policies on tips. Implementation was delayed up to now, however, so that restaurants and related businesses had more time to comply.

Before the new ruling was in place, IRS tips and service charge rules generally did not regard automatic gratuities as “regular wages.” Many restaurants instituted the practice to lessen the possibility that their waiters were deprived of an appropriate tip when serving large parties (typically considered tables of six to eight people or more). This was particularly helpful to servers who depend on tips to supplement their minimum wage rate pay.

As Revenue Ruling 2012-18 goes into effect, restaurants will need to determine the relative benefits and disadvantages of continuing a policy of automatic gratuities. Please call the office for further information.



Written by: Doug Rodrigues