For all of our server friends. Here is a great article by Mackensy Lunsford about new IRS rules concerning automatic gratuities. Looks like you may be paying more taxes soon, or avoiding the auto grat altogether. While I can\'t do anything about the IRS, I can help boost your sales and help you make better tips! Come to our first class \"Wine Sales and Service for the Restaurant Professional\", starting June 10th at 12:00-2:00pm and 6:00-8:00pm. I will share everything that I have learned from 10+ years in the restaurant industry as a waiter and also as a sommelier. In the meantime, good luck out there!
IRS cracks down on restaurant servers
The Internal Revenue Service wants to make sure it gets a slice of the cash tips that restaurant workers pocket. To crack down on unreported tips, the IRS in January put into place new rules regulating how servers get paid. The new laws may change what you see on your bill next time you go out to eat.
New laws say that automatic gratuities — charges often added to bills of parties of 6 or more — are taxed as service charges, which is bad news for some servers. Automatic gratuities are usually added to protect servers from being under-tipped when handling large groups.
According to Joseph Henchman, vice president of legal and state projects at the Tax Foundation, a nonpartisan research think tank based in Washington, D.C., the IRS wants to make sure servers don\'t pocket tip money to earn tax-free income, something that some tipped workers admit to doing.
Carla Gilfillan, a server at Asheville\'s Outback Steakhouse, says the act of pocketing tips is not uncommon, so she\'s not surprised by the crackdown. \"The government wants their money,\" she said. \"Especially when you have a tipped employee, there\'s really no way to prove that we\'re under-claiming. I think the government sees that as a lot of money they\'re missing out on.\"
To help curtail this small-scale tax evasion, the IRS is now drawing a sharper distinction between tips and service charges (to read the new rules, see the box on Page A1). Automatic gratuities are now classified as service charges and factored into hourly wages. Now, employers have to run tips through their payroll system and factor them into hourly wage rates, delaying payment by up to two weeks and causing paperwork headaches for restaurant owners.
Most servers are accustomed to getting paid out in tips at the end of each day, so getting servers to work large parties, said Henchman, will probably be harder. Additionally, it adds to the cost of running restaurants, which were previously eligible for tax credits on tips, but not for service charges, under the new rules.
\"In the restaurant industry, the margins are really thin,\" said Henchman. \"A lot of restaurants fail each year because it\'s a tough industry. It\'s very competitive, and it\'s hard to make money doing it. I think a lot more thought should have been put into the consequences for a rule change like this.\"
To the IRS, it\'s just a clarification in the best interest of tax administration, said Henchman. \"But one that will make life a little bit harder for both restaurants and their waitstaff.\"
A broken system?
Currently, servers mostly rely on their tips for income. In 1991, according to restaurant worker advocacy group ROC United, the minimum wage for tipped employees was $2.13. More than two decades later, this amount has not increased — even when indexed against inflation. Is there an alternative? ROC United studied the impact of raising the minimum wage for servers. (See their findings in the graphic at right).
According to ROC United, prior to 1966, tipped workers received the same minimum wage as other workers. It was not until 1966 that employers were allowed to pay tipped workers a sub-minimum wage, set at 50 percent of the full minimum wage. From 1966 on, customers were expected to foot a substantial portion of employee wages. 1991 was the last year that the sub-minimum wage saw an increase to $2.13.
Further, in 1996, the National Restaurant Association, under the leadership of Herman Cain, negotiated with Congress to permit an increase to the full minimum wage as long as the tipped minimum wage was frozen at $2.13, where it has since remained. As a result, the United States is the only nation where tipped workers must depend on those tips for most of their income.
That\'s worth noting as chain restaurants such as Outback, Olive Garden and Carrabbas report that they have discontinued the automatic gratuity, a practice that sometimes could be a point of contention for servers and diners.
Gilfillan, for her part, is no fan of automatic gratuities, which she said can sometimes put a too-low value on servers\' labor. \"Where a lot of times, if there\'s not an auto-grat, they\'ll just tip you 20 percent anyway,\" she said.
But servers say the automatic gratuity helps prevent under-tippers, and even Gilfillan admits that the new laws have caused her to miss out on a tip with a large party of middle schoolers, she said. \"Middle schoolers don\'t know how to tip,\" she said.
Raising the average
Corinne Romanowski, a server at The Lobster Trap, an independent restaurant in downtown Asheville, previously added a 20 percent gratuity to parties of six or more. But that system has been discontinued by the management of the restaurant.
\"By the time gratuities trickle through the \'new\' system, (servers) are left with 12-14 percent or less,\" explained Kim Murray, owner of The Lobster Trap. And that\'s not at all worth the paperwork, she said. \"It leaves management with the choice of losing money to take care of the server appropriately, or only give them what\'s left after being taxed twice on that gratuity (service charge). No one wins in either instance.\"
\"It\'s not worth the money,\" Romanowski agreed. \"It\'s better to just take a chance and hope that they\'re good tippers. After being taxed, what I\'m going to get back is usually less than what people would give me.\"
According to Romanowski, other staffers like hostesses need her to get big tips, too.
Romanowski tips out a portion of her sales to restaurant employees that help her out, including busboys and hostesses. \"Say a party of seven spends $300 and they tipped me a very minimal amount, I\'m still going to have to tip out the same percentage on the table, even though they didn\'t tip me,\" she said. \"If that\'s a really big table, that\'s going to hurt.\"
According to the Bureau of Labor Statistics, hosts and hostesses are number four among the ten lowest-paying jobs in the U.S. In fact, of those ten, six jobs are in the restaurant industry, with fast-food cooks making the least of all workers. Waiters and waitresses don\'t crack the top ten; their mean income of $20,880 puts them at number 19.
Still, Romanowski said, some days are better than others. \"I can have two nights where my sales were just about the exact same, but my money will differ hugely,\" she said. \"Our whole profession is really a gamble, and you just never know what you\'re going to make in a night.\"
Gilfillan said that, at Outback Steakhouse, printed on the checks for tables of more than eight are calculations for tips of 15, 18 and 20 percent, though it stops short of recommending that you pay any amount.
Sometimes people ignore those suggestions, she said, but getting stiffed on a tip is the reality of being a server. \"It does happen,\" she said.
Gilfillan doesn\'t agree with the law. But the fact that restaurants even need to add gratuity to checks speaks to a bigger problem, she said.
\"It\'s a problem independent of this law,\" she said. \"People not valuing our labor as restaurant workers. The bigger-picture problem is that we feel like we need to be able to add gratuity to checks, because people can\'t be trusted to take care of us.\"
NEW LAWS REGULATING GRATUITIES
VIA THE TAX FOUNDATION
Under the IRS ruling, Rev. Ruling 2012-18, a sharper distinction is drawn between tips and service charges. Both are taxable but tips are reported and cashed out that day. Under the new rules, to be a tip:
(1) the payment must be made free from compulsion;
(2) the customer must have the unrestricted right to determine the amount;
(3) the payment should not be the subject of negotiation or dictated by employer policy; and
(4) generally, the customer has the right to determine who receives the payment.
Automatic gratuities don\'t meet these criteria, so they would be classified as service charges. Employers would have to cycle these charges through their payroll system to distribute to servers, delaying payment by up to two weeks, and factor them into hourly wage rates.