Change in Tip Reporting is Coming

Mandatory gratuities (tips) to become service charges

The long-standing practice of automatically charging you a 15 – 20% gratuity at your favorite restaurant is changing as we speak. The practice of charging customers for tips is normally applied to large parties (tables of 8 or more) or at high profile restaurants. The practice came about to ensure servers handling large groups receive adequate tips. Here is what is changing:

Restaurant Owners

Beginning in 2014 any automatic gratuity added to a patron’s bill is deemed to be service income and treated as wages to employees. This change will mean lower take home pay for servers and it will mean larger social security payments for restaurants as the normal social security tip credit will not apply to these fees. To avoid tips being reclassified as wages a tip must;

• be at the discretion of the customer
• the amount must be determined by the customer
• the beneficiary of the tip is generally to be determined by the customer
• the amount is not subject to negotiation or policy

How this is interpreted by restaurants will continue to evolve.

Servers

This automatic gratuity should not be reported by you as tip income when you report your tips to your employer beginning in January, 2014. It should already be included in your wages. If your employer currently has the practice of adding automatic tips to customers’ bills, you may wish to let them know of this impending change.

Patrons

A number of larger restaurants are temporarily doing away with automatically charging you a tip amount on your bill. This is being done as a test to see if customers continue to add a reasonable tip amount when your dining party is large. Decisions will then be made whether to continue to add this automatic tip charge, or allow patrons to determine an appropriate tip.

While this change takes place over the next few months, remember if service is poor, the gratuity can be negotiable even if it is automatically applied to your bill.

Posted by:

Froley Tax Services
24672 San Juan Avenue Suite 103
Dana Point, CA 92629
Phone: (949) 489-2088
Fax: (949) 266-9931
www.froleytaxservices.com
craig@froleytax.com