IRS rule leads restaurants to rethink automatic tips

IRS rule leads restaurants to rethink automatic tips

Posted:
At Litton's Restaurant in North Knoxville, any party with more than eight people will pay an 18 percent gratuity. At Litton's Restaurant in North Knoxville, any party with more than eight people will pay an 18 percent gratuity.

By MIKE KRAFCIK
6 News Reporter

KNOXVILLE (WATE) - Restaurants across the U.S. are considering an end to adding automatic gratuity charges on large groups of diners.

Starting in January, the Internal Revenue Service will begin classifying those automatic gratuities as service charges. The change will treat the charges as regular wages instead of tips, which restaurants leave up to the employees to report as income.  

At Litton's Restaurant in North Knoxville, any party with more than eight people will pay an 18 percent gratuity.

"At the end of the shift, they always go and put down what their tips were. We're just trying to get everybody in the same standard as the federal government requires," said Litton's owner Barry Litton.  

Litton says servers already count the tips they get as automatic gratuity as part of their income and not as tips.  

For the past two years Shauna Pratt has worked as server at Litton's.

"I don't see it affecting us at all. I mean, we claim all of our tips every day. I don't think it's going to be a big change as far as we can go," Pratt said.  

Jason Hamilton is a tax manager who has done work for restaurants like Ruby Tuesday.  

He says the rule change is a way for the IRS to increase the amount it collects in payroll taxes. He does think the rule change will affect a lot of servers nationwide.

"Where I would see an issue with servers is not receiving the tips on a daily basis or a weekly basis, having them deferred until they actually get their paycheck," Hamilton said.  

"As a server it makes you would have to completely re-budget everything you've done in the past, because you're used to taking everything home at night," said Justin Wright, a manager at Aubrey's Restaurants. 

Aubrey's Restaurant eliminated the policy of servers automatically collecting tips on large parties years ago. 

"If the server doesn't deserve that 18 percent gratuity, a lot of people don't' appreciate having to tip them 18 percent," Wright said.

With the new rule going into effect in January, more restaurants could decide to eliminate automatic gratuities for large parties. 

"If restaurants want to do away with that because they're getting taxed on it, I don't think it's a good thing," said Knoxville resident J. Lewis.  

Darden Restaurants, which includes chains like Olive Garden, Red Lobster and others, is already testing the end of automatic gratuities.  

The test is underway at 100 restaurants in four cities, but Knoxville is not one of them.

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