New Obama IRS Rule on Restaurant Tips Hits Waiters' Wallets, Increases Paperwork

In Wednesday's Wall Street Journal, Stephen Moore had an excellent op-ed about how the Obama economy was hurting the president's political base the most.

The next day, Journal reporter Julie Jargon shed light on an IRS rule change which will adversely affect waiters and waitresses throughout America by judging tips earned as a result of an "automatic gratuity" to be a "service charge" that is subject to payroll and income tax withholding, not tips that are cashed out for the waiter's benefit at the end of his or her shift.

On top of that, the IRS's rule change would mean more hassle and paperwork for restaurants, so many of them will ditch the automatic gratuity they impose on large parties.

Jargon founds that both restaurateurs and waiters are skeptical about this new regulation (emphasis mine):

Texas Roadhouse Inc., which includes a tip of 15% for parties of eight or more at many of its more than 390 restaurants, is planning to phase out automatic gratuities by the end of the year, a spokesman said.

"I think the vast majority of restaurant owners will discontinue the practice," says Denise Wheeler, an employment attorney in Fort Myers, Fla., who represents several restaurant chains.

The change will complicate payroll accounting for restaurants that stick with automatic tips, because they will need to factor those tips into pay, meaning hourly pay rates—could vary day to day depending on how many large parties are served.

Restaurants are required to report to the IRS what its employees report receiving for tips and to pay Medicare and Social Security taxes on those amounts. Restaurants are eligible for an income-tax credit for some or all of those payments, but service charges aren't eligible, according to Marianna Dyson, a payroll tax attorney in Washington, D.C., who represents restaurant chains.

The change comes amid increasing costs and record-keeping requirements for restaurants. In January, restaurants with 50 or more full-time workers will be required to offer health coverage to employees working 30 or more hours a week, though penalties don't begin until 2015.

Restaurants adopted automatic gratuities to help ensure that their servers—whose tips supplement a salary that is often less than the federal minimum wage of $7.25 an hour—weren't stiffed on large tabs. But many servers are likely to support dropping the practice because they don't like the idea of their tips being treated as wages, which requires upfront withholding of federal taxes, and means they won't see that tip money until payday.

"I don't want my tips to be on my paycheck as a wage. I like to get my tips at the end of my shift because I know what I'm getting right away," says Tamie Cordoba, a 54-year-old server at a LongHorn Steakhouse in Jacksonville, Fla.

Ms. Cordoba makes base wages of $4.25 an hour, or $144.50 to $161.50 for her average workweek of 34 to 38 hours. She said she usually makes an additional $500 to $650 a week in tips. Since she never knows exactly how much she will get each week in tips, getting paid at the end of each shift helps her budget, Ms. Cordoba said. "In this industry, that's what we live on. If I had to wait two weeks I don't know how I'd survive."

I don't expect media coverage of this on the broadcast networks, although I'm willing to be pleasantly surprised. In the meantime, kudos to Jargon for bringing to light yet another way in which the regulatory state is making life harder for hard-working Americans.

Economy Regulation Government & Press Internal Revenue Service IRS Barack Obama