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Say Goodbye to Automatic Tips? New IRS Rule Causes Restaurants to Rethink Autograt

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Anyone who's worked in the restaurant biz knows autograting, or the ability to automatically add a tip to a restaurant bill, is a server's best friend. The practice makes it worthwhile to take on large parties because you know you'll get at least a certain percentage of the bill in gratuity. It's a sure thing, which is rare when you work and live on tips.

But a new tax rule might take that sure thing away. An IRS ruling is leading some restaurants to rethink their automatic tip policies, a change that could have big impacts on both restaurant owners and their employees.

See also: Is it Ever Okay Not to Tip?

Starting in January, the IRS will begin classifying automatic gratuities as a service charge, not as tips. That means the charges will be subject to payroll taxes like regular wages. It also means the tips would go on a server's bi-weekly paycheck rather than being taken home at the end of the night.

In addition to meaning more paperwork for restaurants, this could be a hit for servers who, you know, don't always tell the whole truth about what they earn in tips. (Servers are required to report how much they receive in tips to the restaurant, which in turn reports those numbers to the IRS.)

According to the Wall Street Journal, Darden Restaurants Inc., which owns Olive Garden, LongHorn Steakhouse and Red Lobster, already is experimenting with eliminating auto gratuities. The company may switch to a system that suggests tip amounts on receipts instead. Texas Roadhouse Inc., which owns 390 restaurants nationwide, has already said it plans to eliminate the practice before the new year.

And big chains aren't the only places where you might see changes on your bill. Denise Wheeler, an employment attorney in Fort Myers, Florida, told the Wall Street Journal that she thought most restaurants will discontinue the practice.

If a restaurant continued to use the auto gratuity system, that money would have to be factored into a server's hourly wage, which could mean pay rates would fluctuate day to day based on the number of large parties served.

For diners this may seem like a good thing, as some people really hate the idea that restaurants can require a certain amount of gratuity for large parties regardless of quality of service. But for service employees the change could mean all the difference in the world.

"I feel like larger parties don't tip as well as they should for the amount that they spend at the restaurant," restaurant server Michael Turney told USA Today. "When they spend $200 and leave $20, you're losing out on about $16 or $17, when we already pay a tip out to a host, bartender and bussers. It really makes the income of a server go down."

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