Many people working in the food-service industry rely on gratuities provided by customers. Since tips are considered a type of income, tax officials have an interest in those particular earnings. In order to help capture taxes, the Internal Revenue Service will be enforcing a new tip-related tax rule in 2014.

According to the new regulation, restaurants will have to report automatic gratuities as regular income, which will make them automatically subject to payroll taxes. This could end up negatively impacting employees and restaurant owners alike, as they may have a more significant tax liability as the change is put into effect.

At a number of restaurants, larger groups of patrons automatically have a tip added to their bills. When this happens after the new rule is put into effect, all of that tip money will be treated as regular income. This is in response to the perception among tax officials that earnings from tips are consistently underreported.

Many restaurants are responding to the impending change by considering new group-gratuity policies. For example, Darden Restaurants — a company that owns several major restaurants, including Olive Garden — is considering scrapping automatic gratuities altogether. They say it’s in their best interests to look out for employees who rely on tips.

Regardless of how Minnesota restaurants react to the new IRS requirement, employers are still required to pay payroll taxes and staff are required to report their tips. Failure to do so could create legal challenges that require a swift, thoughtful response. As such, employees and employers can benefit from a full understanding of their responsibilities as the result of new tax policies.

Source: Post-Gazette, “IRS ruling may take gratuities off the menu,” Patricia Sabatini, Sep. 8, 2013