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September 18, 2014

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Confused about tipping? Now IRS has reclassified automatic gratuity on bills

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Sam Morris / Las Vegas Sun

Waiter Warren Klein delivers glasses of wine at the recently remodeled Italian American Social Club on Saturday, March 23, 2013.

Career Cocktail Waitresses

June Drao serves cocktails on the casino floor at Sam's Town in Las Vegas on Tuesday, July 17, 2012. Drao has worked as a cocktail server at Sam's Town for 27 years. Launch slideshow »

If you’ve ever dined out in a party of six or more, chances are you’ve noticed the automatic-gratuity charge lurking at the bottom of your check.

The compulsory tip, typically 18 to 20 percent levied on large parties at restaurants and nightclubs, has proliferated in Las Vegas as group dining and bottle service have become mainstays of Strip nightlife over the past decade.

The “auto grat,” as it’s referred to in the industry, ensures that servers head home with a wad of cash in their pockets at the end of the night and serves as a buffer against stingy tippers.

Starting this year, however, the service industry is adjusting to life without the auto grat: An IRS ruling effective Jan. 1 has reclassified automatic tips as service charges, reasoning that the charge is not a true gratuity if the customer is not given a choice about whether to leave it.

The change might seem like a case of semantics, but it’s one that could affect businesses, servers and patrons from Las Vegas to Long Island in small but tangible ways.

Here’s how the change will be felt locally:

Businesses

Restaurants, bars and nightclubs will now have the option to list the auto gratuity as an automatic-service charge or replace it with a suggested-gratuity amount (usually 15, 18 or 20 percent) that leaves the tip up to the customer.

Larger restaurant operators including Darden Restaurants Inc., which owns the Olive Garden and Red Lobster chains, have already adopted the latter, and local restaurants and nightclubs might be inclined to do the same.

Because service charges are recorded as wages rather than tips, switching to them could mean adding to paperwork while losing out on tax credits for Social Security and Medicare taxes paid by the employer on employees’ tips.

“It puts the burden even more on them to report service charges, to collect them. It changes how they report on their payroll, it changes what average wages will be when applying for discounts. It puts a lot of work on the restaurants for that,” says Jean Hertzman, associate professor and assistant dean of operations for the William F. Harrah College of Hotel Administration at UNLV.

Though the added burden might be minimal for larger operations with sizable payrolls and accounting staffs, Hertzman says smaller clubs and restaurants might find it easier to simply leave gratuity up to the customer.

“There’s a lot of employee regulation hitting at the same time, which makes it difficult for the smaller operators,” Hertzman says, pointing to regulatory adjustments from the Affordable Care Act, with which restaurants are already grappling. “Depending on the size of the operation, they may not want to have the extra paperwork.”

Servers

For servers, the difference means taking tips home as part of a paycheck at the end of the week or pay period rather than at the end of the night. Even though a service charge is taxed as a wage rather than a tip, the change won’t add to the server’s tax burden — assuming that they’ve been honestly reporting their tips to Uncle Sam.

However, workers could feel a pinch if their employer opts to forgo the service charge in favor of a suggested gratuity, leaving more of their pay vulnerable to the whim of the customer. Hertzman says servers at nightclubs could be particularly affected.

“People in bars and nightclubs tend to not tip as well as other people, on average. They’re not usually the same people who just won big on the casino floor and celebrate in a restaurant with a nice tip. I can see where cocktail servers would have some negative impact on their salary.”

In a town that caters heavily to tourists, particularly those from European and East Asian countries where tipping isn’t a custom, the auto-gratuity charge also has served as a way to secure tips from customers who might otherwise skimp.

Ruben J. Garcia, a UNLV law professor and labor and employment law expert, agrees that the effect of the ruling still remains to be seen and will ultimately vary according to industry and employee responses.

For now, it’s yet another consideration in continuing negotiations between the Culinary Union and their employers.

“The suggested gratuity takes a lot of the certainty out of people’s income. I think it’s clear that some people won’t follow the suggested gratuity, or it will vary,” Garcia says. “What the union is probably most interested in is certainty in their income. For those who work in chain restaurants that don’t have unions, they have less influence and so less certainty.”

Customers

For the customer, the ruling simply means tipping for large parties and pricey services is reaffirmed as a choice rather than a mandate. Hertzman says the new wording can help patrons avoid overtipping if they don’t realize an automatic gratuity was already added to their bill.

Moreover, tipping returns to being an incentive to employees to provide top-quality service. But without the promise of a large take-home at the end of the night, they may have less incentive to work larger parties.

“Either way, guests are going to have to spend a little extra time looking at their bill at the end of the night,” Hertzman says.

Follow Andrea Domanick on Twitter at @AndreaDomanick and fan her on Facebook at Facebook.com/AndreaDomanick.

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