Action 9: IRS change affects automatic tips for big parties at restaurants

by: Jason Stoogenke Updated:

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CHARLOTTE, N.C. - Customers may already be seeing a big change when they go out to eat. Many local restaurants are doing away with automatic tips for large groups.

Action 9 investigator Jason Stoogenke has more on why restaurants are dropping the practice and who it could affect most.

Mama Ricotta's in Charlotte used to tack on an optional 18 percent tip to the bill for large parties. New Internal Revenue Service rules said automatic gratuity on a party of six or more is not a tip, but a service charge.

"It went from a gratuity to the server to a charge by the restaurant just like another menu item," said Eric Fenner with Mama Ricotta's.

It may sound like a minor change, but restaurants say that changing the gratuity to a service charges means they would have to charge sales tax on it as well, which would basically be like taxing a tip.

For servers, tips count towards minimum wage, but the 18 percent service charge does not. Restaurants would have to pay the difference.

For those reasons, restaurants like Mama Ricotta's are going the simple route: No more automatic tips on bills.

Customers will be able to tip what they want and servers are hoping for the best.

"Most likely they're not going to make as much money on those bigger parties," Fenner said.

Even give the choice, big parties may not tip that automatic 18 percent. Just ask Chelsea Willoughby.

She works uptown at Cowbell where there's no automatic gratuity. When a big table comes in, she never knows what kind of tip to expect.

"Most of the time, it's 15 to 20 (percent), but sometimes it will be 10," she said. "Or even zero. Some people just won't even tip."

The IRS calls the change a clarification of its rules, but some people in the industry believe the IRS is trying to crack down on servers who don't claim all the tips they should.