IRS Tips, Service Charge Ruling On Automatic Gratuities Raises Taxes On Servers

Patrick Frye

An IRS tips and service charge ruling is raising taxes on servers.

As previously reported by The Inquisitr, the IRS gay marriage ruling also ended up raising taxes.

The IRS tips and service charge rules have typically allowed automatic gratuities to not be considered as regular wages for many years now. But starting in January of 2014 these IRS tips and service charge rules will be changed drastically.

The IRS automatic gratuities ruling means restaurant tips will be subject to payroll tax withholding as part of regular wages. Presumably, this would mean the IRS would be taxing tips and service charges with all the FICA taxes, which includes social security and medicare. Due to the recent expiration of the Bush-era tax cuts this means restaurant tips will also be taxed at a higher rate compared to the years prior to 2013.

For the IRS, tips and service charges only become an issue when a restaurant charges automatic gratuities for parties of six to eight people or more. Some restaurant chains print suggested server tips on their receipt, but others would add 15, 18, or 20 percent to the bill automatically. The majority of restaurants do not add automatic gratuities for small parties.

The IRS tips and service charge ruling is likely to cause the majority of big restaurant chains to discontinue automatic gratuities completely. Keeping the existing automatic gratuities would mean a sharp increase in the cost of IRS record keeping. But voluntary tips will not be considered as regular wages by the IRS, which should provide a sigh of relief for America's many workers in the service industry.

Do you think the IRS tips and service charge ruling on automatic gratuities is fair?