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What Has Government Done to Our Tips?

By: Yaël Ossowski - @YaelOss - Jan 2, 2014, 10:11 am

EspañolWaiting tables is hard work, but it’s especially hard when Uncle Sam is on your back.

On January 1, the Internal Revenue Service of the United States began taxing automatic gratuities intended for employees in service jobs. This rule change mandates payroll withholding for the tips that servers receive when waiting tables of six or more people at restaurants.

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The IRS will begin taxing automatic gratuities in 2014.

The IRS claims these tips are actually “service charges” and are therefore “wages for tax purposes,” meaning they are subject to Social Security, Medicare, and federal income taxes.

The rule was unveiled in June 2012 but delayed until 2014, since restaurants indicated they could not comply with the law in time. Rather than accept the paperwork, however, they’re more likely to eliminate the practice altogether, as evidenced by Darden Restaurants, the Orlando-based restaurant corporation with more than 200,000 employees.

In the fall of 2013, the restaurant chains Olive Garden, Longhorn Steakhouse, and Red Lobster — all owned by Darden — eliminated the automatic gratuity option at their more than 2,000 locations to prepare for this rule, according to the Wall Street Journal.

It’s only a matter of time before this idea spreads throughout the service industry and it will hurt no one more than tipped workers who rely on automatic, guaranteed gratuities for their daily wage.

This latest taxation decree from the IRS proves again that no one receives a tougher time with government tax collectors than service workers just getting by. Median pay for food service workers in 2010 was just over US$18,000, according to the Department of Labor.

Due to exemptions carved out in US labor law, tipped employees in most states make a base rate of no more than $2.13 per hour and must make up the rest solely in cash or credit tips offered by patrons. As any server can attest, that base amount is mostly symbolic, as it’s directly eaten up by taxes before it ever ends up in their pockets.

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The IRS practices increased scrutiny on tipped employees in restaurants and service jobs.

As a server in my college days, I remember being haunted by the IRS posters at the clock-in station. I remember the impending threats from management about financial audits unleashed on workers who didn’t declare 100 percent of their tips. I remember having to pay the federal government hundreds of dollars come tax time, despite seeing a hefty portion of my original paychecks go to Uncle Sam.

The more the IRS scrutinizes tipped employees, the more they’ll be doing to discourage and outright harm the lower income people who are more likely to rely on government aid — the very reason such a tax is levied in the first place.

What makes service industry jobs so appealing to those with minimal education or experience is that work is plenty, the skill set required is low, and payment is quick and convenient. A young single mother without a college degree can afford to feed and clothe her baby, and a laid-off plant worker can make enough cash to pay weekly bills between job interviews. It’s most likely one of the first places a teenager will learn to work and interact with the public, skills that will benefit them their entire lives.

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Legal analysts say the IRS rule change will also harm industries.

According to some analysts, the IRS’s move to tax automatic gratuities for tipped workers will not only harm the workers in question, but the entire industries themselves.

“It’s going to affect the individual’s base hourly rate for purposes of calculating overtime. This is the big hidden trap for employers as a result of this change,” said Alden Parker, a labor attorney at the California law firm Weintraub Tobin, on CNBC last week.

He’s devoted a lot of time to advising restaurants on how this IRS rule will negatively affect their bottom line.

“And at some point later on, it’s going to be 2, 3, maybe 4 years down the road, there’ll be enough unpaid overtime as a result of this change to . . . create a very large class action [lawsuit] against the unwitting restaurant employer,” said Parker.

This scenario perfectly demonstrates the law of unintended consequences, as the IRS rule change may directly result in harming not only the tipped employees but also the restaurant owners and managers. It compels reflection on the part of restaurant owners, servers, patrons, and taxpayers alike.

The IRS has seized the cultural norm of how to tip for excellent service and turned it into a practice deemed punishable by the tax man.

If the government’s priority is spending a huge amount of resources trying to nab the extra pocket money made by servers and tipped workers across the country, then we have to ask if this is the kind of government we want.

Yaël Ossowski Yaël Ossowski

Yaël Ossowski is a journalist, informational entrepreneur, and Senior Development Officer for Students For Liberty. Born in Québec and raised in the southern United States, he currently lives in Vienna, Austria. Follow @YaelOss and on his website Yael.ca. Read his featured PanAm Post column, "Question the Narrative."