New IRS rules to count automatic gratuities as wages

Many Americans make their income or side money by working in restaurants as a waiter or waitress. While the salary is often minimal, tips and gratuities can help workers earn comfortable income and work flexible hours. However, waiters and waitresses who make less than minimum wage and rely upon automatic gratuities to bump up their income may not be happy with a new rule the Internal Revenue Service plans to enforce.

The federal tax agency recently announced that is plans to treat automatic gratuities as wages for tax purposes, a move that may impact both workers and the restaurants that employ them. Automatic gratuities are those charges that are built into the bill for large parties. For instance, it's not uncommon for people to see the disclaimer "An 18 percent gratuity will be charged for parties of 10 people or more" when they look over the menu. These tips have historically been used to help waiters and waitresses receive fair tips when waiting on large parties. However, as of January 1, 2014, automatic gratuities will be classified as "service charges" by the IRS.

This means that they will become taxable as regular wages and subject to payroll tax withholding. Currently, these gratuities are considered tips, meaning that it's up to the wait staff to report them as income. 

What does this mean for workers, restaurants?
Because restaurants will soon be tasked with complying with the new mandate, many are considering eliminating these gratuities in order to avoid the additional documentation and headaches the rule may cause, according to the Wall Street Journal. For instance, Darden Restaurants - which owns Olive Garden, Longhorn Steakhouse and Red Lobster - has already scaled back their policies and is considering doing away with these types of tips altogether when the rule fully goes into effect. 

As of July 2013, Darden has already stopped the automatic tips at 100 restaurants in four major cities, "where it is testing a new system in which [they] include three suggested tip amounts, calculating for the customer the total tip with a 15, 18 or 20 percent tip on all bills, regardless of party size," the Journal reports. 

As far as workers go, they will not be required to change any of their forms or make changes to their tax forms with their tax preparer, but the move may result in a small hit to their income. 

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