The end of automatic tips at restaurants?

A new tax rule could mean automatic tips at U.S. restaurants are more trouble than they're worth.
Written by Tyler Falk, Contributor

In the United States, it's not uncommon for a restaurant to automatically include tip in the bill for larger parties (18 percent for groups with eight or more people, for example).

But because of a new rule from the U.S. Internal Revenue Service, that common industry practice could be coming to an end. Wall Street Journal explains it:

Starting in January, the Internal Revenue Service will begin classifying those automatic gratuities as service charges—which it treats as regular wages, subject to payroll tax withholding—instead of tips, which restaurants leave up to the employees to report as income.

The change would mean more paperwork and added costs for the restaurants—and a potential financial hit for waiters and waitresses who live on their tips but don't always report them fully.

The main reason for the change, the IRS says, is that auto-tips aren't voluntary so they should be counted as wages. Of course, one way around the rule would be suggested tip amounts (like the photo above) because it is still voluntary.

This means the practice could be soon coming to an end in the industry. As WSJ reports, Darden Restaurants Inc., which owns 2,100 restaurants in the U.S. including Olive Garden and Red Lobster, is now considering doing away with the practice.

And while they're at it, now would be a good time for restaurants to consider doing away with tipping altogether. For one, it would mean fewer headaches come tax season. But, as one restaurant owner found out, it could also mean better business.

Read more: Wall Street Journal

Photo: Flickr/Manny Hernandez

This post was originally published on Smartplanet.com

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