Mandatory Tips Are Off the Menu
A new tax ruling means diners will decide how much service is worth.
Diners are sometimes surprised (and maybe frustrated) by gratuities that are automatically tacked on to their tabs. The practice — common at restaurants for large parties — has lately been expanding to include parties of any size, particularly at upscale restaurants and those frequented by tourists.
Now those mandatory tips are on the way out, thanks to an IRS ruling that takes effect in 2014. It classifies automatic gratuities as service charges, which are treated as wages rather than tips. The waiter will be taxed the same, but the restaurant will lose the special tax credit available for paying its share of payroll taxes on tip income. Diners are more likely to see suggested sample gratuities on their bills — say, 15%, 18% or 20% — leaving the final amount to their discretion.
Policies are likely to change elsewhere, too. Fox Rothschild lawyer Carolyn Richmond, who advises hotels, suspects that overnight guests and bar and banquet hall patrons will also see language that strongly suggests gratuities but doesn’t impose them.
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Whether the ruling puts a dent in auto tipping on cruise ships remains to be seen because many ships are based outside the U.S. Currently, the norm is to apply a daily gratuity of $10 to $12 to travelers’ accounts. But the purser’s office will usually let you tip the old-fashioned way if you ask.
