Advertisement

April 18, 2014

A Tip For Dealing with Automatic Gratuities in 2014

A new Internal Revenue Service ("IRS") rule, set to take effect in January 1, 2014, may eliminate a common practice in the restaurant industry. Often, an automatic gratuity, normally 18%, is added to the bill of large parties. Automatic gratuities were adopted by restaurant employers as a means for ensuring that servers do not get stiffed on expensive bills. Servers heavily rely on tips to supplement a salary that is often times lower than the federal minimum wage.

Traditionally, automatically-added gratuities have been classified as employee tips. As such, it is up to the employees to report the money as income. Starting in January, automatic gratuities will be categorized as "service charges" - making them regular wages and subject to payroll tax withholdings. Employers will have to track and report any automatic tips and will be required to include the "service charge" payments in employees' W-2 wages. Further, employers will no longer be able to count these tips as a credit to reduce their minimum wage obligation. It is a lose-lose situation because servers will not see their automatic gratuity money until payday; making it more difficult to survive on a small salary.

Many major chains, like Olive Garden and Red Lobster, have eliminated automatic gratuities in response to the approaching deadline. For restaurants that opt to keep the automatic gratuity system, payroll accounting will become much more complicated. Tips from automatic gratuities will have to be factored into hourly pay rates, which means hourly rates could vary based on how many large parties are served in any given hour.

It would be wise for smaller restaurants to follow the chain restaurants' lead by eliminating automatic gratuities altogether. Doing so will not only to lessen compliance requirements and tax burdens, but will also keep employees happy by ensuring that the tips they earn can immediately be pocketed.

© 2014 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.

About the Author

James H. Frazier III, McBrayer Law Firm, Real Estate Attorney
Managing Member

Mr. Frazier is the Managing Member of the firm, a position he has held for the past 18 years. Mr. Frazier's practice focuses on real estate, bankruptcy, mergers and acquisitions and general corporate practice with special emphasis on mineral and energy law. Mr. Frazier has extensive experience in coal transactions (including leases, permitting, coal sales contracts, asset purchases, equity interest transactions, transportation agreements, overriding royalty agreements, consulting contracts, and contract mining agreements). In addition to his law practice, Mr. Frazier also serves as the...

859-231-8780

Boost: AJAX core statistics

Legal Disclaimer

You are responsible for reading, understanding and agreeing to the National Law Review's (NLR’s) and the National Law Forum LLC's  Terms of Use and Privacy Policy before using the National Law Review website. The National Law Review is a free to use, no-log in database of legal and business articles. The content and links on www.NatLawReview.com are intended for general information purposes only. Any legal analysis, legislative updates or other content and links should not be construed as legal or professional advice or a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of information between you and the National Law Review website or any of the law firms, attorneys or other professionals or organizations who include content on the National Law Review website. If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor.  

Some states have laws and ethical rules regarding solicitation and advertisement practices by attorneys and/or other professionals. The National Law Review is not a law firm nor is www.NatLawReview.com  intended to be  a referral service for attorneys and/or other professionals. The NLR does not wish, nor does it intend, to solicit the business of anyone or to refer anyone to an attorney or other professional.  NLR does not answer legal questions nor will we refer you to an attorney or other professional if you request such information from us. 

Under certain state laws the following statements may be required on this website and we have included them in order to be in full compliance with these rules. The choice of a lawyer or other professional is an important decision and should not be based solely upon advertisements. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Statement in compliance with Texas Rules of Professional Conduct. Unless otherwise noted, attorneys are not certified by the Texas Board of Legal Specialization, nor can NLR attest to the accuracy of any notation of Legal Specialization or other Professional Credentials.

The National Law Review - National Law Forum LLC 4700 Gilbert Ave. Suite 47 #230 Western Springs, IL 60558  Telephone  (708) 357-3317 If you would ike to contact us via email please click here.