Over the past year, an increasing number of restaurants have been eliminating tips in an attempt to close the earnings gap between those who prepare the food and those who serve it.
Restaurants are prompted by a spurt of new minimum wage proposals in major cities and an expanding number of restaurateurs are experimenting with no-tipping policies as a way to manage rising labor costs. In some cities like New York, where tipping is subject to a confusing combination of federal, state and local regulations and tax laws, eliminating it would simplify bookkeeping and avoid under-reporting of tips to the IRS. Restaurant managers predict it would also allow them to better calibrate wages to reward employees based on the length of their service and the complexity of their jobs.
So how exactly are restaurants implementing the elimination of tips in restaurants? It is ultimately up to the owner’s discretion as far as details are concerned, however most restaurants that have implemented this change have either increased menu prices by approximately 20 percent or have added on a 20 percent charge to every bill. Restaurateur Tom Colicchio, owner of New York City’s Craft and lead judge on Bravo’s “Top Chef”, said “the only real negative is the customer paying sales tax on it.” However in cases involving revenue-sharing lease agreements, adding 20 percent to house receipts can mean paying more in rent which would result in reduced net profits due to the increase in both payroll and rent expense that could potentially outweigh the 20 percent increase in receipts.
What is the incentive for restaurants to implement a no-tip policy? There are several benefits to the restaurants such as a reduction of risk of being audited by the IRS for under-reporting of tips, the potential to increase profits due to the increase in menu prices and/or percentage charges, an overall increased reliance on the control environment, and comparable and fair earnings for both FOH and BOH employees.
If you are a restaurant owner and interested in implementing a no-tip policy in your restaurant, we can assess your restaurant’s financial structure and recommend ways to implement this policy effectively.
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.