Bay Area Estate And Tax Planning Law Firm

IRS decision to tax automatic tips could hurt waiters’ income

On Behalf of | Sep 9, 2013 | Uncategorized |

As many Californians know firsthand, the Internal Revenue Service makes decisions that can have huge impacts on the lives of many people. Changing tax policies can often make things very difficult for the affected individuals. The most recent decision the IRS made involved the restaurant industry and could leave some restaurants and their staff members struggling to make ends meet.

The IRS reshaped its policy to consider some tips to waiters taxable income. In the past, tips that help many waiters earn minimum wage have not been considered taxable income.

The affected tips are those that are generated automatically. Most often restaurants add these automatic tips to large tables. Until now, they have been considered tips and were self-reported. With the new change, the IRS will consider automatic tips as service charges that can be taxed. 

The new tax would likely increase costs for many restaurants that use automatic tips on large tables, so some restaurants, including the company that owns Red Lobster and Olive Garden, are doing away with the process altogether. While this is a way to avoid being taxed, it leaves waiters and other staff members relying on customers to give a decent tip — something many waiters would probably rather not do. 

Waiters and other restaurant staff members are often paid less than minimum wage because tips from customers are supposed to make up for it. As the IRS swoops in to take away some of that money, restaurants and waiters will likely feel the financial pressure.

Source: The Daily Caller, “New IRS policy taxes automatic tips for waiters,” Patrick Howley, Sept. 8, 2013