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Home » Food & Drink, Live

Automatic “Gratuity” Will Soon be a Thing of the Past

Last updated by on December 30, 2014

You’re out for a nice dinner on a special occasion, then all of a sudden the waiter shows up with a bill. You scan down to the bottom to notice an automatic “gratuity” 18-20% or more. The waiter was serviceable, not great, but mandatory “tip”? If that rubbed you the wrong way, I’m sure you’re not alone.

What once started as a rare “automatic gratuity” for large restaurant groups a few years ago quickly spread to just about any size party at many restaurants.

And even pizza or other food delivery businesses were getting in the game as well – charging mandatory “delivery service fees”. A bit of a sham, since according to many food delivery drivers, they sadly never see a penny of the delivery service fee, even after incurring all of the costs associated with food delivery.

automatic gratuityNow, you know I’m a bit of a frugal guy (probably understatement of the year, I realize, but thought it good for a chuckle). And I RARELY dine out, preferring instead to save money by cooking. However, I do not abuse the tipping scenario as a means to save money. I usually start with a floor of 15% and ceiling of 25% – and the tip ends up somewhere in between, based on service level. I can’t remember the last time that service was so inadequate that I tipped less than 15%.

That being said, I really don’t like the concept of tipping altogether – in fact, hating awkward tipping scenarios is partially what led to me learning how to cut my own hair and I was stressed out for weeks ahead of the inevitable tipping of a kayaking trip tour guide. I would rather just see restaurants and other tipping profession employers simply pay their employees more and charge more for their services. If you’ve traveled out of country much, you’ll notice many countries don’t allow tipping as a form of built-in compensation to justify lower minimum wages paid to employees (although many Americans still feel cultural tip guilt and keep tipping away).

Suggested tip amounts so that I don’t have to play a guessing game, use my brain for math, or break out a phone calculator? That’s fine and dandy. But the automatic gratuity (an oxymoron) particularly rubbed me and I’m sure many others the wrong way.

Well, thanks to IRS rules around automatic gratuity, originated in 2012 but to start being enforced in 2014, mandatory tipping will likely be going extinct next year.

It’s not that the IRS is outlawing the practice, rather, they are reclassifying automatic gratuities as “service charges”, which are treated as wages, rather than tips for employer tax records, with the following statement,

“Service charges added to a bill or fixed by the employer that the customer must pay, when paid to an employee, will not constitute a tip but rather constitute non-tip wages. These non-tip wages are subject to social security tax, Medicare tax, and federal income tax withholding. In addition, the employer cannot use these non-tip wages when computing the credit available to employers under section 45B of the Internal Revenue Code, because these amounts are not “tips.” Common examples of service charges (sometimes called “auto-gratuities”) in service industries are: Large Party Charge (restaurant), Bottle Service Charge (restaurant and night-club), Room Service Charge (hotel and resort), Contracted Luggage Assistance Charge (hotel and resort), and Mandated Delivery Charge (pizza or other retail deliveries)”

The result is that the restaurants would lose a special tax credit that is available to them for paying their share of payroll taxes on tip income (if that income were instead classified as a wage). So many, if not all, employers will stop the auto-tipping practice so that their employees can get tips the old fashion way and then they can keep getting the special tax credit.

Hence, the end of automatic gratuities. It’s a step in the right direction.

Automatic Gratuity Discussion:

  • Do you dislike automatic tipping policies? Are you happy about this change?
  • What’s the most frustrating or highest % automatic gratuity story scenario you’ve encountered?
  • Do you think the U.S. tipping culture should change?

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  • Carla says:

    Yes, I like auto-tips, and no, I’m not happy about the change. I’ve been stiffed more than once by large parties who have demanded all of my attention then declined to compensate me for my work. And no, I’m not going to spend eight hours running around getting treated like dirt by customers for $7.50 an hour when I can make $10-20/hr by treating my customers right. This debate is part of a much larger problem, and eliminating tipping will just cause more problems unless the standards of the service industry are raised. Unfortunately, in an economy where there are 10 people waiting to do your job, we’re not exactly incentivized to work for change.

  • Mandy says:

    Tipping bothers me in general. Why not just pay employees more? I know at my job I work my tail off at work and never get a tip. I’ve heard all the arguments as to why they deserve the tips, but anyone with any kind of work ethic works just as hard (or harder depending on the server) at their job and sometimes get pretty minimal pay too. I don’t believe I should be tipped, I just don’t think I should be required or obligated to tip, no matter how good the service. And no, I don’t stiff servers, I think I fall in the average tipper category, I just don’t like that I am expected to and that the percentage keeps going up. I remember being taught 8-10% but now 15-25%! Crazy!

  • Meggan says:

    when the industry pays more than 2 dollars an hour, perhaps your irritation about auto gratuity would be valid. in general, however, it does not. and many cheapskates, jerk and entitled young kids will run a waitress ragged and leave her two dollars for a party of 15.

    • Mandy says:

      In this state at least you can’t make less than minimum wage and we have one of the highest minimum wage in the country, so that argument doesn’t work for me. I don’t think you should get paid extra for being nice, it is the job you are paid for. I have to be nice in my job, if I don’t, I get fired. I don’t mind, because it isn’t hard to be nice to young children who need you. But this idea that I should be paying someone extra just for doing the job you are paid to do is nonsense. I agree that if you do happen to be somewhere where you are paid an appalling base pay and rely on tips for your pay I get it. That’s not the case in this state though.

      • Mike says:

        Ok so restaurants should start paying minimum wage vs. tip credited pay… so now you’ve doubled the labor cost for the restaurant. So since it is a business and needs to profit that burger you get at many places for $8.95 is now going to be $12.95 because not only did the restaurant have to give all the servers bartenders and bussers raises but now the cooks want more money as well… Also if a server is making a flat wage vs tips do you really think we give a rats patooty about how much your really enjoying your dining experience… Don’t think you will be almost done with your $13 burger before you get your refill on diet coke that you ordered when the food came…nope your server will be in the side station on their cell phone planning their night after they get done and won’t really give 2 shitzles about you…. ( Not that we do now but we have to fake it to get that tip……)

  • Steve says:

    As a concept, I think tipping is silly – just pay workers more. Some may argue that it encourages wait staff to be better; I’d argue that they should be encouraged to do their best job because it’s their job, and if they’re inadequate, they’ll be fired. That being said, I realize that waiters and waitresses make most of their money off of tips so I always tip well.

    The reduction of the mandatory gratuity, however, makes very little difference to me. Unless the service is egregiously bad, I usually tip somewhere from 18-20% anyways. However, I sympathize with wait staff who may not receive as high of tips from cheaper diners.

    • Nothing against tips…but if waiters rely on most of their income for tips, what happens to other workers who are getting paid next to nothing to build houses or clean houses or pick up crops on the fields. Don’t they deserve tips too?

      • meggan says:

        those people don’t get paid $1.80/hour

        • Ron says:

          No one gets paid $1.80 an hour. I think what people are missing is that the price increase to the consumer will be huge. I own a restaurant and you can trust me when I tell you, you do not want a minimum wage employee serving you. In my opinion the wage for a presentable qualified server would be in the neighborhood of $10.00 per hour, thats double what we are paying now. The profit margin is not very good to begin with and the business owners are not going to eat the loss, so think of what that will do to the menu prices, they would better than double. (welcome to the world of $20.00 hamburgers) This is a really bad idea, it will cripple the industry. All the mom and pops would shut down, restaurants would become something that only the rich would get to experience.

  • Josh says:

    It’s funny to hear the waiters chime in on this discussion. Name another industry that can post one price and then “demand” you pay another. Tips have become a MUST in any situation. Tipping is basically the businesses way of passing the buck to customer to pay their employees wages the cheapest way they can. I am willing to bet my house that over 90% of tips given are not being reported and becoming tax free. Raise the prices on the menu to show the real price you pay for the food/service and let people decide if its worth it. Let employers expect more from their wait staff instead of entitled feeling wait staff that some how thinks taking order and bringing people food they didn’t make should be paid $20/hr tax free. Save your eye rolling of my 15%-20% tip and let me go back to the kitchen and hand it to the real workers that get overlooked; chefs and the people who make my food. I don’t go to restaurants to be put on a kings chair and given fake smiles, I go to eat.

  • R W says:

    I recently went out to a restaurant with four friends, party of 5 total, and we were charged an automatic gratuity of 20%. This enraged me. In addition to being a set tip amount, because it was classified as a “service charge” we had to pay sales tax on this gratuity! After sales tax and tip we ended up paying more than 30% of the cost of our food, which was already overpriced.

    Normally I do tip 20%, but I don’t want to be forced to tip someone 20%, particularly when the service is not that great. Then to be charged sales tax on top of that gratuity was just an extra slap in the face.

    I was in Taiwan several months back, it was very reasonable to eat out because there was no sales tax or gratuity, just what we agreed to pay when we ordered the food, what a great concept!

  • Ron Ablang says:

    The majority of the world (other countries) don’t do tipping and I think tipping is stupid for doing a job that is supposed to be done anyway.

  • Jeremy says:

    Anyone know if this rule change would apply to corkage fees at a restaurant? There is this wine bar/store that we love here in Indianapolis. If you order a glass of the bar’s house wine, you pay what you see, but if you order a bottle, they go into their store, get the bottle and then charge a $7 corkage fee, as if you you had brought an outside bottle into the bar!

    • Thats ridiculous. I understand a corkage fee when you bring in your own bottle. Its taking away their business so I’m cool with that.
      But… you are buying an entire bottle of their wine. They do not have to worry about throwing out half the bottle if it goes unused.

      Sounds to me like they might lower the cost of the bottle vs per glass then make it back. I’d never go back to a restaurant that did that.

  • I really enjoyed the diner scene in the movie Reservoir Dogs. One person doesn’t believe in tipping. The others ask him doesn’t he think the waitress worked hard to bring coffee and serve them? He responds that people at McDonald’s works hard but doesn’t get a tip.

    I’ve worked in a truck stop. Waitstaff gets tips. They split them with the bus boys. I was a dishwasher I didn’t get a tip though physically I worked harder then the waitstaff.

    Tipping has become an odd thing I agree with many commenters here. It seems more and more jobs are adding in tipping that I wouldn’t have thought. It counts on generosity of the customer but does impose a possible guilty feeling if you don’t.

    However with all that said, waitstaff get paid below minimum wage so I have no problem paying them a tip at all.

  • Andrew says:

    The best way is for an automatic gratuity on every meal with all positions benefiting – servers, hostesses, bartenders, and cooks.

    Everybody shares the spoils and suffers when things go sideways.

    The quality of the server is irrelevant if the food is terrible, or the place is dirty, or the drinks watered down.

    If people are unhappy with the meal they can get the manager to comp the food or provide other compensation.

  • Edgar @ Degrees and Debt says:

    This is an interesting topic. I dont know how the restaurant industry would absorb the cost of more pay versus no more tipping. Also, there are many places that more pay wouldnt justify the tip loss. During college I had a fraternity brother who worked at a very exclusive restaurant and on a Thur-Sun night he would easily come home with $500+ in cash just from tips. The meals fetched almost $100 and the drinks were no less then $12+ each so I cannot imagine charging even more to makeup for the pay difference without tips.


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