Automatic 18 Percent Tips for Large Parties on the Way Out

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The IRS is changing the rules on forced tips for big groups, and restaurants might ditch them to avoid tax complications.

Gratuitous gratuities are going, if not gone.

You’ve seen it on the menus before — a required tip (usually between 15 percent and 20 percent) for a large group, usually defined as at least six or eight people. Well, starting next year, you’ll probably see less of this fee.

That’s because the IRS won’t recognize them as tips anymore, Consumerist says. Instead they’ll be seen as “service charges” or wages. The IRS reasons (as do many customers) that it’s not a tip if it’s mandatory.

This is a big deal for restaurants. Servers pay taxes on the tips (at least some of them), while the employers pay taxes on wages, Consumerist says. If restaurants keep the automatic “tip,” that will mean lots of extra math and attention on the part of restaurant managers after Jan. 1, when the change takes effect, and less cash immediately in the hands of waitstaff.

On top of the hassle, restaurants will lose some of the tax credit they get for paying Medicare and Social Security taxes on reported tip income, The Wall Street Journal says. Service charges aren’t eligible.

Darden Restaurants, the owner of brands including Olive Garden and LongHorn Steakhouse, is already testing out a system without those automatic gratuities in 100 restaurants, the WSJ says. Generally, it has charged 18 percent for groups of eight. It will decide whether to make the change everywhere and permanently by the end of the year.

Stacy Johnson

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