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I swore off tip threads but . . . IRS says restaurants can't add gratuity . . .


In a resort area like Hawaii, especially with large numbers of visitors who are not accustomed to tipping, this is going to create havoc I'm sure.

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  1. Not just in Hawaii...There are plenty of chowhounds who have no idea how to tip either.....and there are those that do not tip and a sub category that does not want to either.

    But in reality, the service charge will be added and more accounting will be the result....If the staff still wants their job...they have to agree or walk.

    1. ... unless it's taxed like regular wages.

      So restaurants can auto-grat all they want, and can even increase the auto-grat % if they feel it is necessary.

      The server gets paid their wage, and fulfills their tax obligation like any other working person. Paying my fair share of taxes hasn't created too much havoc in my life, I think the industry will survive.

      (Yeah, I swore off tipping threads too. Oh well!)

      1. But all tips are already subject to federal withholding. You don't have to withhold all of the tips, just enough to meet payroll obligations.

        1. 'You gotta make it to pay it'

          This is better than being taxed on a minimum of 8% of sales even if you got stiffed by the table.

          All this regulation does is make the establishment help the IRS enforce the law.......................

          1. Not sure what the issue is here.

            Where I am in the world, income is income and is taxed accordingly. Doesnt matter whether that comes from old fashioned tipping or from a service charge (although the former does offer the opportunity not to declare income to the tax authorities)

            5 Replies
            1. re: Harters

              Harters, after casinos, restaurants are used for money laundering here in the US. Hence, the IRS wants to keep very close tabs on the money.

              1. re: INDIANRIVERFL

                "... after casinos..."

                Not in the last 50 years or so. Read up on the Gaming Commission and how they have cleaned up the casino industry.

                1. re: PotatoHouse

                  I have never had a problem being corrected by smart, polite people. Old memories and the universality of restaurants versus the location of Nevada and Atlantic City for gambling. As I don't gamble, I keep forgetting about the recent explosion in gambling locations in the US.

                  Thank You.

                  1. re: INDIANRIVERFL

                    I try to be courteous, but with no inflection coming through on the internet, I fear being misunderstood. And then there are times when i let my emotions override my good sense.

                    You're welcome.

                  2. re: PotatoHouse

                    With regards to casinos....yes, they have been cleaned up...but they are still used very much to clean cash....for example coin operated businesses.

              2. At the restaurant I work in they will no longer add gratuity. Since we already have to declare what we take home, and most of us do, I'm not sure why the government is changing this rule. The IRS will and does audit restaurants if the tips are under reported.

                1. This article is misleading. Tipped employees have always been required to declare their tips and the employer is required to withhold and pay payroll taxes on the tip amount as if they are wages.

                  Anyway, there are a couple of technical consequences to the autograt being treated as a service charge vs. as a tip. However, what fun would tax law be if it was easy to understand? Not to mention putting me out of business...Off the top of my head, here are three:

                  1. For the employer: Only tips count toward the employers' tip tax credit (credit in the amount of social security taxes paid by the employer on tips treated as wages). If it's treated as a service fee, it doesn't qualify for the employer's tip tax credit.

                  2. For the customer: In some states (like Washington), a service charge is subject to sales tax so the autograt is included in the taxable charges, whereas a tip is not.

                  3. For employer and employee: In some states, employers can count certain tip income of employees toward the employee's wages for wage & hour purposes (e.g. as long as the employees actual wages + tips are more than the minimum wage amount, the employer isn't in violation of minimum wage laws). Other states prohibit this practice. If a service charge is treated as wages rather than a tip, the employer may be able to use it for credit toward the server's wages to hit the minimum wage threshold, where they might not have been able to count an equivalent tip.