My first job out of high school was waiting tables at a small local restaurant. I was paid $0.50 an hour and any tips I earned. This was a long, long time ago before the IRS cracked down on tip reporting.
Today, a server is supposed to report to their employer any tips they receive unless their tips are less than $20 for the month. The employer includes this income on the employee’s W-2 and matches Social Security and Medicare withholding. Currently, any gratuity automatically added to the bill for service to larger groups is treated as a tip. This will be changing January of 2014. The IRS says that these are actually service charges and have to be added to wages.
Here’s what happens; server Jane gets a table of 10 at Busy Café. She gets drinks and takes orders. When the food is ready, she deliverers it to the table, refills drinks and cleans away empty plates. Since Busy Café doesn’t have an automatic tip policy, Jane has to rely on the tips the group leaves on the table. At Family Restaurant, they do have a policy of automatically adding an 18% tip to tables of over 8. That means that server Joe knows he will receive a good tip for that table for the same work. Both Jane and Joe will walk out that night with their tips from their big table and should report them to their employer on Form 4070- Employee Report of Tips to Employer at the end of the month with the rest of their tips.
This will change when these tips are treated as a service change in January. The employer will have to track these charges and add them to the employee’s paycheck subject to withholding, Social Security and Medicare. That means that Joe won’t walk out with the tip from his large table that night. He will have to wait until payday to see that money. The advantage to the IRS and disadvantage to the restaurants and servers is that tips are underreported. Most servers learn early how much of their tips they have to report. Underreporting of tips saves everyone, servers and restaurants, the income tax and Social Security/Medicare on that income. This is why we may be seeing fewer automatic tips on bills in the future.