Nothing is more frustrating to a server than frantically running to keep a table of 12 happy, only to find that the table thought a 5% tip was more than enough. In comes the server’s knight in shining armor: The Automatic Gratuity. On the face, they sound awesome! A guaranteed, appropriate tip for the server and no need to break out the phone calculator for the guests. What could be the downside? (que ominous music from “Jaws”). The involvement of government agencies that clouded up the whole issue. Sigh…
Auto gratuities have two issues and they have to be looked at and treated separately.
Minnesota Sales Tax involvement. MN sales tax code says “When a tip or service charge is added to the bill by the seller, that amount is taxable. This is true even if the amount is separately stated or distributed directly to employee.” To further confuse the issue, if the customer’s bill included liquor, the appropriate percentage of the auto gratuity should also be liquor taxed. Can your Point of Sale system even do that??
Department of the Treasury involvement. They decided that these auto gratuities are NOT tips at all; instead they are non-tip wages. That basically means that the employer must pay Social Security and Medicare taxes on the automatic gratuity and they are NOT entitled to get that back as a Tip Credit on Form 8846. That boils down to the restaurant having to pay 7.65% of the auto gratuity to the government.
Whether you choose to charge auto gratuities or not, just make sure you’re doing things correctly. If you have ANY questions, please contact me: firstname.lastname@example.org.