When Thomas Howard sees an automatic gratuity on a restaurant bill, one thing is for certain: His server won't be getting any more than that amount.
If restaurants tack on the charge to his bill, the Indianapolis resident said he doesn't think servers should expect any more. But when it comes to leaving less, he thinks that's not even allowed.
"I don't think you can, can you?" Howard said. "You've got to go by whatever their policy is."
He's confused – and a little put off – by the whole "automatic gratuity" practice, and he's not alone.
That practice is receiving more scrutiny lately because of an updated IRS ruling taking effect in January that will treat automatic gratuities as service charges, rather than tips. The switch means servers will no longer be responsible for reporting those automatic tips as income. And it also means automatic gratuities will be considered a part of a server's wages, making them subject to payroll tax withholding and delaying the receipt of those automatic tips until an employee's next paycheck.
Understandably, many servers aren't happy about the tax policy, but neither are restaurant owners. The IRS change will create additional accounting and bookkeeping work for restaurants, because automatic gratuities will have to be factored into hourly pay rates that could vary depending on the number of large parties served by the employee.
"Some may be equipped to deal with that additional accounting," said Patrick Tamm, president and CEO of the Indiana Restaurant and Lodging Association. "Some may not."
It could also mean the loss of an income tax credit, which restaurants receive for paying Medicare and Social Security taxes on employees' reported tips. Service charges are not eligible for the credit.
Industry officials say the change could have a great impact on Indiana, where restaurants are projected to register $9.2 billion in sales in 2013. Restaurants account for 296,100 jobs in the state – 10 percent of the work force.
"It's a big deal because it impacts in one way or another 10 percent of the work force in the state of Indiana," Tamm said. "Not all employees in restaurants are tipped employees, but they could still pay for it."
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