NCPA - National Center for Policy Analysis

New Rule Could Cut Into Restaurant Workers' Tips

January 13, 2014

As of January 1, a new tax rule will prevent restaurant workers from collecting automatic tips, says

  • Many restaurants automatically collect gratuity for parties of certain sizes -- many impose an 18 percent fee on groups of eight or more.
  • However, a new IRS rule now requires that fee to be added into payroll, which means that workers will have to pay taxes on the tips and wait up to two weeks to get them.

Pat Forciea, marketing director for Hell's Kitchen in Minneapolis, says that his restaurant now "suggests" an 18 percent gratuity for large groups but is not automatically adding the amount to the check. Darden-owned restaurants (this includes Red Lobster and Olive Garden) will begin listing recommended tips of 15, 18 and 20 percent on all checks.

  • In many states, restaurant workers are paid below the minimum wage, the assumption being that tips will make up the difference and result in a wage that meets or exceeds the minimum.
  • The federal minimum wage for tipped workers is $2.13 per hour, though some states have higher wage requirements.

The old rule was that employees had to disclose their tips to their employers on a monthly basis, and the employer would then deduct income and payroll taxes from the tip amount. The new rule lowers the possibility that an employee will report lower tips than were actually received each month.

Source: Eric Boehm, "New IRS Rule Could Cut Into Restaurant Workers' Tips,", January 6, 2014.


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