IRS Policy Change on Gratuity

Beginning in January 2014, we will see an IRS policy change on gratuity, affecting how restaurants classify automatic gratuity.  Currently, many restaurants include an automatic gratuity for large parties, typically 8 or more people. Under current tax law automatic gratuity is considered a tip, so it is up to the wait staff to individually report it as wages on their tax return.  Beginning in 2014, the IRS will consider any automatic tips as regular wages. The IRS has determined that in order for wages to be considered a tip, patrons must be able to determine the amount on their own. So, any type of automatic gratuity would be considered a service charge, not a tip. Therefore, automatic gratuity must be reported as regular wages. This means businesses will be responsible for reporting the wages on W-2’s and paying proper payroll taxes, which will be costly and increase their administrative burden. Some large restaurant chains have made the decision to stop the practice of including automatic gratuity.  That may be the best bet for smaller restaurants as well, although it remains to be seen if ending the practice will have a negative effect on wait staff.