The IRS now considers automatic gratuities for restaurant servers to be regular wages.
Happy National Waiters and Waitresses Day! On this day each year, we recognize the hard work that those who serve us food and beverages do each day to satisfy our cravings. However, while being a server can be a very rewarding experience, the IRS has made it a little more difficult for servers this year from a tax and financial perspective.
A Lowdown on the IRS Rule Change on Automatic Gratuities
The IRS enacted a new rule in January 2014 that treats automatic gratuities as a service charge instead of a traditional tip. This change means that restaurant servers are no longer responsible for reporting these types of tips as income on their tax returns. While this sounds like one less thing they now have to do, it also means that automatic gratuities are now considered a part of a server’s wages. So this money is subject to a payroll tax withholding. Plus, it delays servers from getting this much-needed cash at the end of their shifts to whenever they receive their paychecks.
The change has created additional accounting, payroll, and bookkeeping considerations for restaurant operators since automatic gratuities are now included with hourly pay rates, which often vary based on how many larger groups a particular server takes care of in a given time period.
For years, many restaurants have tacked on an 18% automatic gratuity to the tabs of parties with six or more guests. The goal has been to reduce mathematical confusion on how much to tip – and to ensure servers get their fare share in tips on top of their minimal wages.
Dropping Automatic Gratuities Altogether
Experts say this IRS policy shift on tips could affect restaurants hiring new waiters and waitresses since it adds new costs and accounting requirements to their responsibilities. Because of this, many large restaurant chains are exploring dropping their automatic gratuities entirely in order to make the tipping situation a little better for everyone.
For the restaurant, the new rule means they must pay taxes on these additional wages, which they did not have to in the past. Eliminating these gratuities takes away this burden. Employees get their money faster as well.
However, some servers at eateries where there are no automatic gratuities placed on bills have seen diners give them much lower tips than they would if the recommended amount was on their tabs. But, ultimately, servers at these restaurants still get their tip money much sooner than they would if it were added on to their weekly or biweekly paychecks.
On another note, many servers find it easier to report their income by having it all lumped together when it comes time to file their taxes and pay Uncle Sam.
The bottom line, experts say, is that there is still lots of unnecessary confusion in the tipping game from an IRS taxation standpoint. This uncertainty will continue until a clearer set of guidelines is implemented.
How 1-800Accountant Can Simplify Your Tax-Filing Needs
If you are unsure what the IRS considers to be taxable income, turn to 1-800Accountant for all of your tax-filing needs. The firm’s accountants, CPAs, and enrolled agents will ensure you remain IRS compliant and claim all tax-saving measures to help you keep more of your money. Call 1-888-749-0117 or click over to www.1-800Accountant for more information.
Image credit: The image of the restaurant server is used with permission via the Creative Commons license through Flickr.