IRS Ruling on Automatic Gratuities Leads to Paperwork and Costs for Restaurants

Many restaurants that continue to include automatic gratuities on checks for large parties of six or eight will face additional paperwork and costs due to an IRS Ruling that takes effect January 1, 2014. The IRS Ruling is in fact not new, having been adopted in June 2012; however, implementation was delayed so restaurants had time to comply.

So, what’s the change? Beginning on January 1, 2014, the IRS will begin classifying automatic gratuities as a service charge instead of a tip, which means that the wages are subject to payroll tax withholdings.  The change will complicate accounting and bookkeeping for restaurants, according to a recent article in The Wall Street Journal.  It also could lead to a loss in income tax credits that restaurants receive for paying Medicare and Social Security taxes on employees’ reported tips. The credit is not available for service charges.

Some restaurants are instead switching to a suggested tip amount of 15%, 18% or 20% on all checks regardless of the party’s size.  This change gives restaurant patrons the choice to leave the suggested amount, a different amount or nothing at all, which makes the payment a tip rather than a service charge.

IRS Bulletin: 2012-26 provides further guidance for restaurant owners and accountants.

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About Mike Durant

Mike Durant was named New York State Director of NFIB in May 2011. Prior to joining NFIB as the Assistant State Director in May 2010, Durant began his career in the New York Senate working in the Office of Member Services. From there, he served in a number of positions during former New York Governor George E. Pataki’s administration. As a Research Specialist in the New York State Office of Demographic Policy, Mike was responsible for drafting a redistricting proposal for Governor Pataki. In addition, Mike served as a Research Specialist for the Empire State Development Corporation, as well as the Associate Commissioner of Human Resource Management with the New York Department of Labor. Durant also spent four years working at the Questar III BOCES as a specialist focusing on the complex formulas that drive aid to school districts across the state while also taking a lead role in the state legislative/budget process as it related to education policy. These past positions have given Mike a deep understanding of the complex political economics of the State of New York. Active in the community, Durant has served on a number of boards in both the village of Ballston Spa and Town of Milton. Durant received his bachelor’s degree from Siena College in Loudonville, New York and resides in Ballston Spa with his wife and two children.
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