Is the party over for automatic gratuities?

The IRS wants to tax restaurants, not servers, on the service fees imposed on large parties.
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Glad it was Applebee’s and not your restaurant that got caught up in that mandatory service charge flap and subsequent employee firing that made the national news? Don’t gloat too much. A recent Internal Revenue Service ruling could have many operators rethinking how they handle automatic tips for large parties. First, the Applebee’s incident in brief: Pastor hosting party of 10 in St. Louis unit declines to pay 18 percent automatic service charge, crosses it off check ...

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Discuss this Article 11

Michael Busch (not verified)
on Feb 19, 2013

I think there is some confusion with your statement, "It spells out what is and what isn’t a service charge or a tip—the difference being that restaurant operators have to pay FICA on service charges but don’t on tips." In fact, employers need to pay FICA on both tips and service charges (wages). The difference is that the restaurant can claim a Tip Tax Credit
only on FICA paid on tips.

RestaurantOwner (not verified)
on Feb 23, 2013

Absolutely agree. We pay fica on all tips. The tip income credit is what is at debate here. And when we take the tip income credit we don't get to deduct the fica taxes we do pay, so the benefit of the tip credit is not as lucrative as it seems. A credit is generally worth more than a deduction, but there were many times in the past when we didn't get the tip credit because our AGI was too high (and let me tell you that threshold was low...). Now it is easier to take but still not all it's cracked up to be. Let's face it, we all chose a business that's not so easy to make money in!

Anonymous (not verified)
on Feb 19, 2013

Since when are tips not subject to FICA tax? Any tip declared requires the employer to pay FICA tax on the amount.

Anonymous (not verified)
on Feb 19, 2013

Help me understand the implications. If paid as a 'tip', it is reportable to the IRS as taxable and subject to FICA. Were service charges being 'not declared' except on some kind of 1099 basis? I don't understand how FICA wasn't already being processed.

Anonymous (not verified)
on Feb 19, 2013

There is no such thing as an automatic or required gratuity. Gratuities by definition are voluntary and the customer may choose not to pay it, decrease it, or add to it. It must be given, down to the penny, to the service staff.
Service Charges are required and the restaurant owner may keep part of it. It is taxable.

Anonymous (not verified)
on Feb 19, 2013

Would it be too novel of an idea to pay servers a salary and withhold taxes at the same rate everyone else does? Believe me it works all over Europe - let's try it - like treatment for all tax payers

Anonymous (not verified)
on Feb 20, 2013

service would suffer because of lack of incentive and menu prices would soar

Anonymous (not verified)
on Feb 20, 2013

Not a problem if you are willing to pay the higher prices that will have to be charged

Jess Owen (not verified)
on Feb 20, 2013

It is no wonder that the customers don't know the difference between "automatic gratuities" and "service fees" when this publication uses the terms interchangeably in the headline and sub-head.

Restaurant Hospitality, specifically Bob Krummert, was this an oversight on your part?

In the article you quote Applebee's statement of "To be clear, the 18% gratuity added to large party tickets was paid by the guest’s party." And in the next paragraph you say "Case closed, we hope. But it may cause a few restaurant operators and a lot of restaurant customers to rethink their views about restaurant-imposed service fees for large parties." which links the two statements together. However, Applebee's is talking about a "gratuity" and you are talking about "restaurant-imposed service fees for large parties". Please be clear, are you suggesting that Applebee's "gratuity" is actually a "service fee", are you confused by the issue, or are you knowingly trying to confuse your readers into thinking that they are the same when they are not?

Anonymous (not verified)
on Feb 20, 2013

The challenge with paying regular salaries or wages at or above regular minimums is that the cost of that would be passed onto the consumer, something we Americans are not accustomed to. Many in the restaurant industry have struggled with this. Some restaurant operators have considered paying regular wages, but that would mean increasing menu prices because the margins in restaurants are already tight. Consumers would feel immediate inflation and the concern is that people would stop eating out for a period of time, at least, and this would hurt the entire industry. Servers who make excellent tips would argue to keep the existing system because they run the risk of taking a cut in pay to go to a straight wage scenario. It would be a period of adjustment, and I'm not sure it is one our economy can absorb right now. Some states do not allow tip credits, so those servers are making more in base wage than in other states. The cost of doing business there is challenging.

Anonymous (not verified)
on Feb 23, 2013

Ok well thats just bs above. Americans couldnt handle paying for a meal that is priced the same as a meal with a standard tip? BS! My restaurant just axed all autograts cause they dont want to have to pay. This is just going to force restaurant workers to unionize further and collectively bargain away the whole tipping system in general. And I doubt the wage that replaces the tip will be compareable to what waiters make now. What employer is going to pay $28/hr to a server? Yeah thats my hourly rate with tips factored in. Not much considering i work 4-5 5hour shifts a week. And I work my ass off for those tips. Already a coworker had a 25 top the other day of arrogant armenians, $250 bill, wanted every item on a separate check and after payment they left him $9. And yet the IRS automatically will calculate he made an additional $20 something and deduct it from his return or add it to his taxes. So for the hour he's working his ass off to end up owing money. Yeah 13th ammendment prohibits involuntary servitude. Restaurants will either find a loophole or servers will be replaced with a cashier at a counter, because it will only take so many of those tables to conclude your losing money and we'll quit. Yeah maybe its ridiculous to spend $2.75 on a glass of pepsi or $12 for a plate of spaghetti but they do and if your throwing away $15 bucks on something you could buy and make at home for $3. You might as well just throw your server an extra $3. We had to talk to you and pretend to give a damn about what you'll be crapping out tomorrow.

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