Drake Software blog for tax pros, covering tax, IRS news, and more

IRS Ruling May Take Gratuities Off The Menu

IRS Ruling May Take Gratuities Off The Menu

IRS Ruling May Take Gratuities Off The Menu

The practice of automatically adding tips to bills for big groups -- often tables of six to eight people or more -- could quietly disappear following an IRS ruling that forces restaurants to classify such charges as wages, not tips.  That’s the reading on new regulations reported by the Pittsburgh Post-Gazette.

"Say Goodbye to Automatic Gratuities" is how one law firm put it in an alert to the hospitality industry last year in anticipation of the ruling that's now set to take effect Jan. 1.

Florida-based Darden Restaurants -- operator of Olive Garden, Red Lobster, LongHorn Steakhouse, The Capital Grille and others -- said it would decide by yearend whether to eliminate automatic 18 percent tips for parties of eight or more at its some 2,100 locations.

The country's biggest casual dining chain already has dropped the practice at 100 of its restaurants in various markets across the nation. Instead, it prints suggested gratuity amounts on diners' receipts -- for 15, 18 and 20 percent of the total bill, excluding tax -- leaving the tip line blank for customers to fill in.

"We're testing this change in an effort to determine the best way to preserve tips for our employees while following the IRS guidance," spokesman Rich Jeffers said.   "The feedback we're hearing from guests is that it is very convenient."

Darden began rethinking its tip policy after the IRS issued updated guidance further clarifying a decades-old rule that treats mandatory gratuities as wages, subject to payroll taxes. The agency planned to start enforcing the regulation in earnest this past January, but delayed the action until Jan. 1, 2014, to give businesses more time to comply.

The action could complicate record keeping and could end up raising payroll taxes for servers and restaurants where automatic tips continue to be imposed.

The ruling would have little or no impact on businesses' payroll taxes if wait staff correctly reported all tip income to their employers as required by law, the IRS said. Practically speaking, however, taxes could go up if some workers have been underreporting their tips.

Source:  Pittsburgh Post-Gazette at http://www.post-gazette.com/stories/business/news/irs-ruling-may-take-gratuities-off-the-menu-702413/#ixzz2ePdtA4Tm


admin taxing_subjects