Restaurants Eliminate Automatic Tip Policy

Restaurants Eliminate Automatic Tip Policy

CREATED Jan 7, 2014

by Jason Lamb

NASHVILLE, Tenn. – An IRS rule change may prompt restaurants all over the country to end their long-standing practices of adding automatic gratuities to the tabs of large groups.

It's a common practice for a restaurant to tack on the gratuity as a means to protect their waiters and waitresses, who can make as little as $2.13 an hour, and depend on tips for much of their income.

Beginning in 2014, the IRS is treating automatic gratuities as wages, arguing that a gratuity can't be considered a true tip if it's not voluntary.  That change forces those automatic tips to be taxed and held until the next paycheck, creating a paperwork nightmare for restaurants.

"It's complicated enough as it is the way the tax system is set up," said Greg Hilbourn with Germantown Café in Nashville.  "To add one more thing to it is one more piece of work."

So instead, many restaurants are now simply doing away with their automatic tips policies altogether to avoid the complications. The move potentially puts servers at risk of getting stiffed by customers who tip poorly, or who think the tip is already included.

The IRS rule has prompted changes at some big nationwide chains.

Olive Garden and Texas Roadhouse are just two chains who say they've now done away with their automatic tipping policies.

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