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Tag Archives: autogratuity

New IRS ruling explained by David Hayden

From David Hayden’s most excellent site, “The Hospitality Network”. David is also the author of a valuable book, “Tips2: Tips For Improving Your Tips“. The book is worth its weight in gold for servers who want to give themselves a raise.

David’s article is about a new IRS ruling regarding automatic gratuities (autograts).

Tip definitions

Tips– voluntary but expected payments for services rendered. Also inaccurately called gratuities. Inaccurate in the sense that they aren’t considered gratuities in the usual sense for tax purposes. Even the IRS confuses this on occasion.  True gratuities are not considered taxable income (subject to limits) in any other area other than in the “tipped employee” realm. It is my opinion that the IRS needs to address this and eliminate the term gratuities whenever it’s discussing tips.

Tip Pool– any arrangement where all employees throw their tips into the hat. Tips are then redistributed according to pre-agreed to terms.  In the case of bartenders, this redistribution can occur as a percentage of the number of hours worked as shifts can vary. In the case of servers, this redistribution can follow the same guidelines as a traditional tipout (see below). 

Tipout – an arrangement where each individual server is responsible for distributing a portion of their individual tips to other tipped employees in payment for services rendered. this is usually expressed as a percentage of either total sales or total tips.

Autogratuity (autograt) – a specialized service charge added directly to the bill in lieu of a voluntary tip. Usually noted on the menu as something added for specific circumstances such as a table exceeding a certain number of people. Normally computed on the pre-tax total.

Service charge – an extra charge in lieu of tips. This is usually applied to the entire bill for every table in the restaurant regardless of size. Occasionally, this is a charge imposed for a booked private party. Normally computed on the pre-tax total.

Credit card fee deduction from tips – exactly what it means. The fee that a business pays the credit card processor. Not allowed to be deducted in all locales. Check your local state regulations.

Things to know – employers are not allowed to take any portion of a tipped employee’s tips with the exception of credit card fees. In some states, employers are allowed to deduct for walk outs or breakage, but in some states, this is expressly forbidden. Tips are considered to be the “sole property” of the tipped employees except that tipouts are allowed as long as it’s a prior agreed to arrangement by all employees affected. Service charges and autogratuities are not considered tips and are therefore the property of the employer. In the case of autogratuities, these are normally treated as tips by employers although employers aren’t bound by law to do so. In the case of service charges, in some cases, they are used in toto to pay all wages of tipped and non-tipped employees. In some cases they are treated as simple tips and in some cases, they are used to “tip out” kitchen employees and private party booking managers. This is totally legal.

I hope this clears up the distinctions between these different terms. They are sometimes confused and misunderstood.