Last year, while dining at a local restaurant with a friend, I had an experience I’ve never had before. The restaurant was chaotic, filled with a pre-show dinner crowd. When we got the check, there was an 18 percent gratuity included. I balked. An automatic gratuity for two people?
It wasn’t the amount — I always leave a 20 percent tip at restaurants — I just didn’t understand why the server would add it automatically. I shared the experience with a colleague and was surprised to learn she had dined with a friend at the same restaurant on a busy show night but did not have an automatic gratuity added to her bill. Huh?
So when I learned the IRS is now enforcing the end of automatic gratuities, or “auto grats” in restaurant lingo, I can’t say I was very upset. Some establishments have clearly applied their policies unevenly. But the change may have an impact on our dining experiences.
Here's the background. As of Jan. 1, auto grats must be classified as service charges. A service charge is considered revenue for the restaurant which means not only can servers not treat them as tips, but customers will be charged sales tax on it as well.
Local restaurants have been grappling with how to proceed, says Bob Wagner, CPA for NetFinancials, which provides tax and accounting services for 200 restaurants in the Southeast. “Big operators are seeking ways to remove auto grats entirely. The little guys are saying…if I take my auto grats off, some of my servers may walk away,” says Wagner. “We are in a period of experimentation.”
Larger chains are experimenting by including suggested tip amounts for diners to choose from on the check in place of auto grats, Wagner says.
Chef Jason Hill says he will stop using auto grats at his restaurants, Wisteria and Folk Art, but not without some concern. As a test, he once tracked payments of large parties for a month. Thirty to 40 diners in larger parties requesting separate checks left no gratuity.
Hill worries about how casual dining establishments will manage. “I think we are all going to regret a lot of what we are doing because people aren’t going to be able to afford servers,” he says.
Here are some of the ways IRS enforcement of this law could change your dining experience:
- If restaurants keep auto grats for large parties (or a service charge as it will be known), you will have to pay sales tax on that amount.
- With no guarantee of a standard tip for servers — who might spend up to three hours servicing larger groups — smaller restaurants may try to avoid booking large parties during peak hours.
- In the future, more restaurants may simply avoid hiring waitstaff altogether and become counter service only.
So as the crackdown continues, at the very least be sure you're up to speed on tipping protocol. Don't tip like Hill's aunt, who leaves $2 regardless of the check amount, he says.
And if you do have a large party, have a little empathy for your server.
