IRS taking a bigger bite out of restaurant tips

For the last 18 years, Christi Ashley, a waitress in Amarillo, Texas, has relied on tips to make ends meet. "$2.13 an hour doesn’t go very far, so, you know, we really do depend on the gratuities we receive," she told CBS News.

Now, because of a new IRS rule, waiters and waitresses like her are losing a dependable source of tips -- the gratuity many restaurants automatically add for larger groups of customers. The rule, which took effect on Jan. 1, distinguishes between what is a tip and what is a service charge. According to the government, tips must be given voluntarily.

By contrast, anything that is automatically added to the bill is considered to be a service charge, which restaurant owners must treat as wages. That could mean higher taxes for servers.

If that seems minor, then chances are you’ve never worked in a restaurant. As Ashley points out, she’s not the only one counting on that money. At the end of a shift, waitstaff usually give a percentage of their tips to bartenders and busboys.

“Being able to add that gratuity helps with being able to pay everyone else,” she said “So that’s the major thing right now: We don’t want to end up in a situation where we’re responsible for paying them and then we don’t make any money off the table. So we don’t want to work for free.”

The automatic tip also means the waitress doesn’t have to worry about being stiffed by a large group of people.

That money "means taking care of my daughter,” said waitress Kylie Patterson. “I’m a single mom, so you know that’s money that I could use to take care of her and be able to provide a better life for her. So taking a gamble with our income is hard because you never know.”

Restaurant owners are none too happy about the rule change, either, because it means more paperwork for them.

Some analysts say the new rule isn’t needed. “The IRS views this as the latest step in their effort to crack down on underreported tip income, although previous enforcement efforts... and the shift from cash to credit for most payments has ended this evasion for the most part," Joseph Henchman, vice president of the Tax Foundation, wrote in a post on the non-partisan think-tank's blog. "To the IRS, it’s just a clarification ‘in the best interest of tax administration.’ But one that will make life a little bit harder for restaurants and their waitstaff."

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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