The automatic restaurant tip and the pizza delivery charge are suddenly off the table, but not because eateries will suddenly grow generous in the new year.
Both charges are likely to disappear from menus in 2014 due to a change in the federal tax code.
Many restaurants automatically add tips for parties of six, eight or more; many pizza joints charge a delivery fee. And diners have paid up for years—perhaps decades. But now the Internal Revenue Service says neither is a tip.
"These amounts are not ‘tips,'" the IRS said.
And that matters.
"Service charges added to a bill or fixed by the employer that the customer must pay, when paid to an employee, will not constitute a tip but rather constitute non-tip wages," the IRS said.
LINK: IRS TOPIC 761: http://www.irs.gov/taxtopics/tc761.html
The new non-tip distinction has ramifications for restaurants because tips and wages are classified differently. Wage income triggers a domino effect that could cost a company substantially more money.
"These non-tip wages are subject to Social Security tax, Medicare tax, and federal income tax withholding," the IRS said.
It's likely cheaper for a restaurant to remove automatic charges than to pay increased taxes.
Orlando-based Darden, which owns the Olive Garden, Red Lobster, and Longhorn Steakhouse restaurant chains, will remove automatic gratuities from its menus.
"Effective January 6, our restaurants will no longer add automatic gratuities to guest checks for parties of 8 or more," said spokesman Rich Jeffers.
Instead of adding a service charge to a large party's check, Darden will suggest tip amounts (15%, 18%, and 20%) on that customer's receipt.
"Of course, it's up to the guest to leave whatever tip amount they choose," Jeffers said.
The IRS said its new classification of automatic tipping applies to other common fees, including: bottle service charges in restaurants and night-clubs, room service charge in hotels, and contracted luggage assistance charges at hotels.
FOX 13 / WTVT-TV
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