IRS changes rules on automatic group tips

New IRS rules on how restaurants must classify automatic gratuities that are often charged for groups went into effect January 1, 2014. The IRS is likely to start cracking down on stragglers who haven't started following the new rules. These new rules may apply as well to entertainment centers. You should check with your tax consultant.

Under the new rules, restaurants have a choice:

  • They can ditch the automatic gratuity and make it an optional tip, or
  • They can charge an automatic service charge, which will then be subject to both sales and payroll tax withholding and require restaurants to pay servers the full minimum wage.

Restaurants may suggest tips on large parties, but the IRS Ruling 2012-18 states customers must maintain the unrestricted right to determine the tip amount and generally who receives it.