Friday, April 18, 2014
By J. Craig Anderson email@example.com
Like most other restaurants in Maine, DiMillo’s On the Water in Portland says it will no longer charge automatic gratuities for most large groups now that a change in the federal income tax code has closed a long-standing loophole.
Cameron McManus, a server at DiMillo’s On the Water, carries lunch to diners. A tax code change has prompted some restaurants, like DiMillo’s, to end automatic gratuities for large dining parties. Some waitstaff worry that tips will be overlooked or reduced as a result.
Photos by Gabe Souza/Staff Photographer
A patron signs his credit card receipt at DiMillo’s. The IRS altered its tax code in 2012 to draw a distinction between voluntary tips and mandatory service charges.
The tax code change, which took effect Jan. 1, forces restaurants to treat automatic gratuities as service charges rather than as voluntary tips. That means that the automatic tips are taxable wages, and must go through a more stringent accounting and taxation process, restaurant and tax analysts said.
Some restaurant employees said eliminating automatic gratuities could reduce their income, because large parties don’t always tip enough to compensate for the time it takes to serve them. Others said they would rather eliminate mandatory tips than be forced to receive that income as part of a weekly paycheck.
Food servers and bartenders already are required to report their tips, even when they are in cash, to the Internal Revenue Service as income and pay the required taxes. That doesn’t always happen, said Greg Dugal, president and CEO of the Maine Restaurant Association.
“They should claim them all, but we all know that may or may not be true,” Dugal said.
Still, he said, as diners increasingly pay with credit and debit cards instead of cash, tips have become more traceable by the Internal Revenue Service and restaurant staffers are reporting more of their income than in decades past.
Tax analyst Joseph Henchman of the Tax Foundation, a nonpartisan think tank based in Washington, D.C., said the IRS decided in 2012 to draw a sharper distinction between voluntary tips and mandatory service charges as part of a larger crackdown on unreported wages. The IRS gave restaurants until Jan. 1 to prepare.
The most significant outcome of the policy change is that automatic gratuities no longer occupy a legal gray area, and must be treated by employers as regular wages, Henchman said.
“The likely result is that restaurants will discontinue automatic gratuities for large parties, to avoid additional compliance costs and to allow employees to take their tips home on the day they get them,” he said. “Getting servers to work large parties will probably be harder.”
NO EFFECT ON MINIMUM WAGE
In Maine, the minimum hourly wage for a worker who receives tips is $3.75, provided that the worker earns an average of at least another $3.75 per hour in tips for a total of $7.50 per hour, the state’s minimum wage. If not, the employer must make up the shortfall with regular wages.
The tax policy change has no effect on the minimum wage or how it is calculated, Dugal said.
Most automatic gratuity policies apply only to groups of eight or more and require a surcharge of 15 to 20 percent, with 18 percent being the most common rate.
The majority of restaurant owners in Maine are opting to do away with automatic gratuities, often noted on the bill as a service charge, because the alternative would be to deal with a more complicated system of accounting, Dugal said.
“Service charges always have to be passed through payroll and paid out through payroll,” he said.
Darden Restaurants, the corporate parent of Olive Garden and Longhorn Steakhouse, is no longer adding automatic gratuities to guest checks for large parties, according to Rich Jeffers, director of communications for the Orlando-based company.
“As a convenience for our guests, all checks now include suggested tip amounts of 15 percent, 18 percent, and 20 percent, regardless of party size,” Jeffers explained in an email. “Of course, it’s up to the guest to leave whatever tip amount they choose.”
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Adam Sousa, a server at DiMillo’s Restaurant, takes the dessert order of Michael Kemna of Cumberland and Sherry Biegel of Gorham after lunch on Thursday. Sousa says he understands the reasoning behind dropping automatic gratuities, but he thinks waitstaff may suffer until guests in large parties become familiar with the need to tip.