Servers don't see an upside to new IRS tip rules

Stefanie Fariss has been in the food service industry for nearly four decades, starting as a bartender when she was 18.

Tips have been a big part of her income over the years.

Now, she and her colleagues are facing changes in how they’ll be compensated for their service to restaurant patrons.

Beginning in January, the Internal Revenue Service will count automatic gratuities for large parties as “service charges” instead of tips.

The automatic gratuity would count as regular wages, and employment taxes would need to be withheld instead of leaving it up to servers to report as income.

“We’re not really excited about it,” said the 57-year-old Fariss, a waitress at Shells Seafood in Melbourne.

Tipping, or gratuities, has become a hot-topic in the food service industry these days, including Brevard County, which has more than 23,000 workers employed by the leisure and hospital industry.

Not only are there changes from the IRS, but some restaurants across the United States want to replace the tip wage structures with a flat wage by adding a service charge to every check and divvy it among their staff.

It’s a small movement that’s gaining traction in cities such as New York and Chicago, but has yet to gain a foothold in Florida.

Whether or not some Sunshine State restaurateurs go that route, what is known is that many restaurant workers such as Fariss aren’t too happy with the IRS reporting requirements.

Beginning in January, the IRS will count automatic gratuities as “service charges” instead of tips. The automatic gratuity would count as regular wages, and employment taxes would need to be withheld instead of leaving it up to servers to report as income.

Restaurants often add a tip — anywhere from 15 to 20 percent — for parties of eight or more. Those “tips” though become services charges and subject to payroll tax withholding.

Regular tips, though, are up to the discretion of a customer. The tips, also, are up to waitstaff to report as income to the IRS.

And restaurant operators typically don’t like to get involved with the tip issue, said Joe Hutchinson, associate professor and chair of the department of food service at the University of Central Florida.

“In a restaurant you really don’t want to be involved, as a manager, with tips I can tell from experience,” Hutchinson said. “You don’t want to be in the middle of it. Typically, you’d prefer your employees take care of that. They’re given tips and they decide what to do with them.”

Darden Restaurants Inc., owner of restaurants such as Olive Garden, LongHorn Steakhouse and Red Lobster, has long included automatic 18 percent tips on the bill for parties of eight or more at its more than 2,100 restaurants, but is experimenting with eliminating them because of the IRS ruling, said a spokesman.

The chain in July stopped automatic tips at 100 restaurants in four cities, where it is testing a new system in which the restaurants include three suggested tip amounts, calculating for the customer the total with a 15 percent, 18 percent or 20 percent tip on all bills, regardless of party size.

Diners can opt to tip more or less than the suggested amounts, or to not tip. Depending on how patrons react and how well the new software system works, Darden may switch to such suggested tips at all of its restaurants. A spokesman said the company will decide by year-end.

And the policy at Texas Roadhouse Inc. — which has two locations in Brevard — of including a tip of 15 percent for parties of eight or more at many of its more than 390 restaurants, is planning to phase out automatic gratuities by the end of the year, a spokesman said.

It all comes down to the restaurant’s bottom line, said Denise Wheeler, an employment attorney and partner at Fort Myers-based Roetzel & Andress.

“In order for it to be a tip, the customer has to have complete discretion over it,” said Denise Wheeler, a Fort Myers employment attorney.

One reason restaurants aren’t likely to forgo tip wage structures is that they get a tax credit on the tips and don’t have to pay the employment withholding taxes, Medicaid and Social Security taxes. They pay those taxes only on the hourly tip wage, she said.

The federal minimum tip wage is $2.13 per hour, and in Florida, the state minimum tip wage is $4.77, but that’s only for direct wages. If an employee’s tips plus their employer’s direct wages don’t equal the federal minimum wage of $7.25 (Florida’s is $7.79), the employer must make up the difference, according to the Fair Labor Standards Act.

While Florida allows a tip credit for employers, other states, such as California and Washington, don’t.

“They end up paying the employee so much less money,” Wheeler said. “It’s a huge benefit to the restaurant industry to be able to lower their labor costs.”