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| In the future, more restaurant debit/credit slips will look more like this, to meet IRS regs ensuring that customers can choose how much to tip, so that the restaurant does not have to deal with the new "Service Charge" definition of auto-gratuities. Image: Flicker & Manny Hernandez |
Compliments of your friendly Internal Revenue Service.
There's a new IRS ruling that I'm not happy about at all. Now, I'm not grumbling as if this new rule will somehow mean that I/we owe MORE taxes on our tips and gratuities, as you might suspect. It doesn't mean that at all. It's an intense new cluster of paperwork that I can clearly see will make many restaurants drop the practice of auto-gratting, solely to avoid the hassle.
I can already see where all of this will result in less taxable income to me overall, which is why I don't like it.
The gory details are spelled out in many recent articles, like "Restaurants May Have to Change Tip Reporting Systems," "IRS Says Auto Gratuities Are Treated as Wages, Not Tips," and most telling of all "Say Goodbye to Automatic Gratuities."
These articles are rather technical, so boiling things down for you, as I see it the new ruling creates at least two distinct sets of problems for restaurants with an auto-grat policy, in order to remain compliant with the new IRS regulations:
1) The ruling means that the IRS is forcing restaurants to create new (as in extra, not merely different) classifications for reporting servers' income. The new and different columns will revolve around instances of whether the gratuity you pay still fits the old definition of a "tip" or the newer one of a "service charge." If you the customer did not solely determine the specific amount of the tip (as is the case with an auto-grat, which again started as the servers' protection mostly against exceptionally huge losses on large parties) then it is deemed to be a service charge, not a tip.
Which does make sense, I realize. It's kind of like the "labor" you pay for when you get your car worked on - it's a fixed amount that the establishment sets. However, being that it's an actual charge, many states are going to collect sales tax on it, meaning the customer loses out because of higher prices. Oh, and since it's now a charge that's paid to the restaurant (not a tip paid to the server) the restaurant can legally KEEP all of it they want to, and pay their employees whatever they deem appropriate, so long as it's above minimum wage. I can't help but see greedy corporations and dishonest business owners skimming portions of the "service charge" right out of the servers' pockets and into their own. Adding insult to injury, many servers will get their share of these "service charges" on our paychecks now, not on the night you dined. So the waiters lose in this new math as well as the customers.
"The State," meanwhile, will now require separate and additional types of accounting to make the restaurant compliant with FICA laws. I'm always taxed on all tips already, and it's not clear whether this would mean even more taxes owed by me or not (not the point), but it will require much more complicated and headache-inspiring diligence by the restaurant's accountant or accounting firm to keep straight. This obviously will cost them time and probably money to sort out.
2) The auto-grat - now called a service charge - creates all sorts of implications for payroll purposes, requiring near-incomprehensible micro-divisions and sub-categories of wage and taxation classification. This ruling creates new and difficult calculations of what our true "hourly pay" actually is - which could now change on any given day or shift! This creates additional complications in regards to computation of our over-time pay (which we rarely are allowed) becoming even more costly for the restaurant.
The worst part is that if a server has one or two auto-gratted tables on a given night, then three or four which are not, he or she would in effect be working at two different pay-scales simultaneously! This would be a nightmare to keep straight, and downright impossible for a restaurant to correctly track and report, thus inviting the IRS to get on their backs and all up in their business in new and creative ways. And who wants that?
Net result of these factors being the probable elimination the auto-grat entirely by many small businesses and large chains alike. They'll just naturally wish to avoid the paperwork headaches, additional accounting and taxation costs, and probable fines for getting it wrong (because it looks really hard to ever get this new system right).
The only other way to avoid the confusion would be for a restaurant to auto-grat EVERY table, regardless of size. It's possible that only this method could guarantee complete consistency and elimination of errors in their payroll. This would be simple, but definitely not popular, as I'm sure you can agree. That's the way things are done in Europe, and Americans customers don't like the service we get from most European waiters any more than American waiters like the way European customers tip.
Am I right, or am I right?
The losers are many in this system, and the only clear winner I can see is big government. The restaurants lose as operating costs increase and good help goes elsewhere, if they don't both keep the auto-grat and comply with confusing and costly procedures. The servers lose personal income at the places that drop the auto-grat just to avoid dealing with the whole mess. The customers especially lose as the additional labor and accounting costs increase and get incorporated into meal prices.
What I don't think the I.R.S. sees coming however, is that they are just creating anew the very problem they've been trying to solve for decades ... Many, many years ago you see, the I.R.S. became aware that many waiters and waitresses weren't reporting all of their cash tips as income at the end of each shift. Since the 1990's (in my experience), I've witnessed restaurant owners and managers increasingly "tighten the nut" on making sure their waitstaff claims their tips by stricter and stricter policies, to avoid being open to I.R.S. audits and intense scrutiny on their business practices.
This problem has all but gone away in fact, with the rise of Debit Cards however - 95% plus of tables I wait on today pay via debit or credit, and how much they tip is recorded in writing and entered into the computer. All that meaning that the numbers of servers who are accurately and honestly reporting their tips is probably higher today than it has ever been. Not to sound all Ron Paul on you, but this occurred because "the market" itself created the solution (debit cards), not big government or legislation and paperwork.
But these new rules on auto-grat and service charges, I think, are going to have unforeseen results. How so?
Simple - I think more and more people are going to return to tipping in cash. As word spreads, and it becomes common knowledge that the restaurants you eat it are possibly keeping a portion of the service charges and credit card tips to line their own coffers, and that your servers aren't even taking home much of what you *thought* you tipped them, but are now having to wait on their paychecks and hope the employer actually gives it all to them ... I simply think that a new generation of former restaurant people and sophisticated diners who know such details are going to respond with sympathy, and with cash tips, to make sure that the person who actually waited on them actually receives the tip they actually left. My personal thanks to you if this is your choice. I'll still claim it like I always do anyways, but under this new way of doing things, the service charge has a lonnnnnng way to travel before it hits my bank account, and tipping in cash really will again become the best way to reward good service.
So how did these new rules get started anyways? I can only guess, but I'm willing to bet that some IRS agents went out to eat somewhere as a group, their table got auto-gratted, and they were miffed about it.
Perhaps they vowed revenge, and secretly plotted the best way to make sure it would never happen again.
Whatever the case, the IRS may well have succeeded in bringing a near-end to the auto-grat as we know it, as restaurants deal with the practical repercussions of this new legislation, effective January 2013.
So, have my labors of these past few months been in vain? Is this book obsolete before it even sees print?
Nah. For one, many of you readers are becoming better tippers to your servers, or so I'm hearing from you. I do additionally hope that you'll take the time to perhaps be more scrutinizing over your choices of where to eat as well. I hope that you'll reward (with your presence, and discretionary dollars) the places that keep their auto-gratuity, despite the hassles they're going through to be fully IRS compliant.
And just if and when you actually do have a choice of where to eat, it's still my personal opinion that you will generally receive a much higher level of service and professionalism from the waiters and waitresses qualified to obtain, and keep, jobs in restaurants that include auto-gratuity, largely because they want to retain long-term skilled servers.
The old addage says "you get what you pay for..." I believe that the distinction in service levels will become even more apparent to you, both as this new ruling plays out, and as corporations and chains make their choices as to whether or not to include an auto-gratuity in their billing.
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