New IRS Rule Could Spell The End For Automatic Gratuity

The rule classifies automatic gratuities as taxable wages.

bill cu

Photo: Bill Shaw

Many chain restaurants automatically charge a set gratuity to large parties.

A rule that takes effect on New Year’s Day could mean the end of the automatic gratuity.

Historically, the IRS considered an automatic gratuity a tip, and it was up to the server to report the income. The new rule classifies the gratuity as a service charge that is subject to a payroll and sales tax.

This means if restaurants continue to impose the fee, guests will have to pay taxes on the gratuity where before they did not.

Initially imposed in 2012, the IRS pushed back the implementation to give business owners time to comply.

Automatic gratuities are common practice in larger chain restaurants, where they are assessed to large parties. But the new rule has prompted some of the big names to drop the practice.

At Lennie’s Brew Pub in Bloomington, General Manager Michael Fox says an automatic gratuity has never been their policy.

“We’ve never practiced automatic gratuity,” Fox says. “We kinda feel like gratuity ought to be up to the guests to determine the amount based on quality of service, generally.”

Fox says their employees report their tips daily and he declares the income in a monthly report for tax filing purposes.

Jimmy Jenkins

Jimmy Jenkins is a multimedia journalist for WFIU and WTIU news. A native of Terre Haute, he is a masters student at the Indiana University School of Journalism and is proud to be a part of the public broadcasting stations he listened to and watched since he was a child. Follow him on Twitter @newsjunkyjimmy.

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