An updated tax rule is making some restaurants reconsider adding automatic tips to the bill of the larger parties.
In January of 2014, the Internal Revenue Service will start to classify automatic gratuities as service charges, so it would be treated as regular wages. That means it would be subject to payroll tax withholding. Currently, they are classified as tips and restaurants leave it up to employees to report as income.
The change would mean more paperwork and added costs for restaurants. It could also mean a potential financial burden for waiters and waitresses who live on tips and don't always report them in their entirety.
Darden Restaurants owns Olive Garden and Red Lobster among several restaurant chains. For many years, the company has included automatic 18% tips for parties of eight or more, but it has experimented with eliminating them at 100 of its restaurants in four cities. At those restaurants, the receipt includes three suggested tip amounts, showing the customer the calculation for a 15%, 18% or 20% tip on all bills, regardless of how many patrons are in a party.
A server's salary is often less than the federal minimum wage. Automatic gratuities aim to make sure servers are not under-tipped on large tabs.