When Americans receive good service at a restaurant, most understand the concept of adding a gratuity or tip to the price of the meal. This payment is usually a percentage of the total meal cost, averaging between 10 and 15 percent. However, where a group meal is involved, i.e. an arranged large party meal at the restaurant, then most businesses impose an automatic tip to pay for the waiter involved not being able to serve other tables during that schedule group meal. The IRS, however, now wants to treat automatic tips as a service charge versus a gratuity, triggering payroll tax withholding responsibilities on a restaurant employer for its waiters.
The change was originally decided in an IRS hearing in 2012, but the actual implementation of the reclassifying of automatic tips as service charges will now take effect as of January 1, 2014.
Understanding Waiter Pay
While waiters may seem to earn a lot with tips, one has to understand how waiting tables actually pays in a night. First off, there’s only so many tables a waiter can process in a shift. If people stay longer, than that means a given table won’t be available for new customers. So the maximum earned depends on how many customers can be turned over in a night.
Second, waiters can be paid a minimum wage as low as $2.13 an hour if they make up the difference in tips. As longs as the waiter earns a minimum of $7.25 an hour, the employer can avoid paying the rest of the salary. This forces the waiter to rely on tips far more than other employees. Those who barely bring in gratuities can only expect to be paid federal minimum wage per hour each shift.
Third, automatic tips ensure a waiter at least has a chance to earn more than minimum wage during a shift dominated with a group event.
In either situation, the tips are literally the bulk of the take-home pay a waiter relies on for personal living and paying bills. So any changes would mean a cash flow pay cut for such employees.
Many understand the plight of the restaurant waiter facing the possibility of tax withholding changes and a reduction in take home pay. The fact is, a lot of people worked in restaurants as teenagers and young people, with the job often being their first foray into working for a business or company. So there is a large level of sympathy for waiters either losing automatic tipping as employers drop the feature with group service, or employees seeing less cash each night come home with them.
It’s not likely that the new tax withholding change is going to go away. The IRS has been pursuing a number of changes across the tax world to boost tax collections, particularly up-front tax withholding. Waiters, unfortunately, are on the rough end of this issue as employers will likely just drop the automatic tip feature, forcing a waiter to deal with a group and try to get other tables at the same time. Either way, waiters are likely going to have to work harder for the same hourly pay each shift.