New IRS Rules Creates a Lose-Lose Situation for Restaurants Dealing With Automatic Gratuity

I have some no bueno news (c/o Iris McCallister) to share. If you’ve ever been a server/still are a server at a restaurant, you’re going to be pissed. Last week, the Wall Street Journal reported that the Internal Revenue Service has updated a tax rule that will change how a lot of dining businesses are run.

Starting in January, the Internal Revenue Service will begin classifying those automatic gratuities as service charges—which it treats as regular wages, subject to payroll tax withholding—instead of tips, which restaurants leave up to the employees to report as income.

As a customer, I’ve always appreciated the automatic gratuity placed on my tab when I’ve sat with a large group. This practice ensures that cheapskates don’t get to leave without tipping the proper amount. But now, with this new rule, some restaurants are dropping the automatic tip. Instead of servers getting to take home their tips at the end of the night, the new rule means that “tips [will be] treated as wages, which requires upfront withholding of federal taxes, and means they won’t see that tip money until payday.”

Well, crap.

For restaurants that do keep automatic tip, “the change will complicate payroll accounting for restaurants that stick with automatic tips, because they will need to factor those tips into pay, meaning hourly pay rates—could vary day to day depending on how many large parties are served.”

It’s definitely a sucky situation for restaurants and servers both.


  • Peter Kurilecz

    just supports the ol’ joke “hi i’m from the government and I’m here to solve your problems”

  • Kevin

    Why is that so bad? Tips ARE wages for servers. Why shouldn’t they be treated as such? Everyone else in the country has to deal with upfront withholding of federal taxes and we also don’t see our money until payday.

    • Greg Brown

      Because the trade off for sub-minimum wage pay is cash in the pocket. Now there will be less of that to go around–either you wait till payday or don’t get it all all becasue your party stiffs you.

  • Matthew

    Here is a pretty easy solution – have the restaurants stop adding the auto gratuity…why is that a bad thing? I never tip more than what is added and oftentimes would have tipped more had they not added it.

    Plus, it keeps the servers from phoning it in when they have a large table. Too many times when dining with a group I’ve dealt with servers who offer the absolute worst service knowing that their tip is set regardless of the service they provide.

  • Christopher Barnes

    Some restaurants utilize a system that take all tips and pays them out on a bi-weekly basis, after paying all taxes involved. As a server I actually prefer this method as last year I got some of my taxes back in the form of a return. Service staff fall into three categories those going to school, those who have nothing better to do and want to party all night, and professionals who usually have another side venture. As per the current laws regarding pay wait staff are usually facing a huge tax bill in the $2-3,000 range because the $2.13 an hour wage covers very little of your federal taxes. That said unless you have student tax deferment, very few wait staff who take cash home, pay taxes. At the high end of fine dining you can probably pull in $50,000 a year in Dallas. That’s living paycheck to paycheck in today’s dollars.
    I like to pay my taxes. I believe they are vital to any country.
    The question is this…
    5 million servers owing the government $2,000 is 10 billion dollars.
    How much time and paperwork to go after 5 million servers?
    dozens of large corporations make more than that quarterly as profit while paying very low taxes respectively.
    That’s trillions of dollars over the course of a year.
    All the while for years now, they are afforded the lowest taxes and interest rates ever, they still don’t seem to be to interested in creating good paying jobs with these profits. They pay large bonuses instead.
    Thousands of Million/Billionaires around the world do business in America and have off shore accounts to funnel profits and avoid taxes.
    That’s why I prefer smaller government. Use less people and money to go after the bigger fish

  • Jason Heid

    I’d just prefer to see tipping outlawed anyway. Tips perpetuate racism and sexism, and academic studies have shown that they have very little relationship to the quality of the service provided. Listen to this Freakanomics podcast:

    Just charge us more for food and drinks.

    • runDMC

      I’m not disagreeing necessarily, but I’m not sure if there’s a better alternative. In Europe, tips are insignificantly small, so the servers are on salary and man, does the service suck.

    • Ramrodicus

      Jason, you’re crazy. If you don’t want to tip, then don’t go out. Stay home. It does NOTHING to perpetuate racism and sexism. It’s a performances based industry, if a server is great at what he/she does, then reward them. If they suck, simply don’t. Have you ever dined in Australia? The service is horrible out there because the servers don’t care if you get good service or not because they’re not getting tipped! Think about it.

  • Zachary Maynard

    I don’t blame them. Its probably because of the vegas grating bs.

    • Ann Gaspari

      Vegas grating b.s.??? Huh?

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  • Trace

    My experiences in Europe (lived in four countries and travel there 2-3 times a year) have been very different. At modest and nicer places I seldom see poor service. If pushed, I’d say that I enjoy the service in Europe more than here in the US. Maybe I’m more used to the vibe.

    One difference between the States and Europe that I will note is that most servers in Europe seem to be career professionals, often with the same restaurant for many years (or a lifetime). Their interest in providing good service may therefore be motivated from keeping a good reputation and a steady clientele. Agreed that can (but rarely, IMO) mean that visitors (non-regulars) may not see the same level of service.

  • merrimanwines

    Yeah I didn’t catch that one either.

  • Jennifer Roberts

    Just because you claim to leave above the 18% added gratuity doesn’t mean kawanda and her 18 kids and 2 cousins do when they walk in 2 minutes to close, destroy the section you just spent 20 minutes cleaning and leave you 3 dollars on a 200 bill, now with that being said work a week in the service industry. You’ll understand the purpose of auto grat.

  • Jennifer Roberts

    Well that was RACIST! I also work in the service industry and I can get stiffed by all races. Kwanda and her “18 kids and 2 cousins” could be servers and know about the 20%, so don’t always be so quick to judge with your small minded insensitive ass!