Restaurant Groups Weigh in on New IRS Tipping Rules

New IRS rules distinguishing tips from service charges could change pay and record-keeping practices for restaurants. Industry associations are jumping in to help their members with compliance.

If you’re heading into a restaurant with a large group of people, you might notice something a little different on your next check.

In 2012, the Internal Revenue Service issued rules now set to take effect in January that classify automatic gratuities, such as an 18 percent tip for parties of eight or more, as service charges subject to payroll tax withholding. Tips, on the other hand, are left to the customer’s discretion and up to employees to report as income.

Restaurants are now chewing over whether they should update their practices, and associations are trying to help them prepare. More details:

What this means for restaurants: They’ve always been keeping an eye out for their employees. Initially, automatic gratuities were added to checks to protect servers from getting shortchanged by large dining parties. But now, with federal tax withholdings set to be taken from automatic gratuities, servers (who often make less than minimum wage) wouldn’t see that money until pay day. Some restaurant owners, already spending extra money and time preparing to comply with the Affordable Care Act’s requirements, are considering other solutions to avoid even higher payroll taxes and more-complicated record-keeping. For example, Olive Garden’s owner is testing a new tip system, in which checks, regardless of the size of the dining party, include three suggested tips amounts: 15 percent, 18 percent, and 20 percent. This wouldn’t be considered a service charge subject to federal withholding under the new rules because the customer would choose the tip amount.

How associations are addressing the issue: The National Restaurant Association has filed comments with the IRS, asking for more employer protection, incentives for employees, and clarification about tip agreements. The California Restaurant Association is also helping its members understand the new rules with a Q&A on its website that includes specific examples of what counts as a tip and as a service charge. The American Hotel & Lodging Association outlines the new guidelines on its website and submitted comments to the IRS in support of its members. Among its suggestions: Consider specific circumstances before penalty, clarify standards that are not addressed in the guidelines, and consider more industry suggestions.

How do you help your members understand the ins and outs of new regulations in your industry?


Rebecca Scherr

By Rebecca Scherr

Rebecca Scherr is a contributor to Associations Now. MORE

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