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Restaurant News

Restaurant 101: IRS to Start Enforcing Automatic Gratuity as Restaurant Income

The IRS will begin enforcing law that considers mandatory gratuity as income.
By Nancy Nichols |
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If you are a restaurateur or a server, you need to pay attention. After you watch the protesting-doing-math-at the-table clip from Curb Your Enthusiasm video,  you need to do some math homework. Starting January 1, 2014, the IRS is going to start enforcing a law that has been in place for a while. Like most laws, it sounds sexy: Tax Treatment of Mandatory Gratuities.

Here’s the short version: If you automatically add a gratuity of 18 percent or higher on parties of six or more, the money collected will be treated as a service charge which, in turn, is considered restaurant income. And if said charge is distributed to service staff, it is considered wages, not tips.

A service charge is an amount automatically added to a customer’s bill by management. The IRS lists four factors, all of which must be present in order for the customer’s extra payment to be deemed a tip and not a service charge:

1.    The customer’s 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 the employer policy;
4.    And, generally, the customer has the right to determine who receives the payment.

Read the law and discuss. Don’t get blindsided.

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