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Is this the end of auto gratuity in Vegas?

This new IRS rule might mean the end of the automatic gratuity that has become so custom in Las Vegas nightclub and Vegas pool parties. Every Las Vegas nightclub server knows the beauty of the automatic gratuity. That $500 bottle of Grey Goose that gets a 20 percent auto-grat is the key to a far better living than working at any other restaurant. The question is: will the change in the IRS rule that goes into effect January 1st make some of the Vegas pool parties do away with auto-gratuity altogether.

Automatic Gratuity Changes Details

The IRS came to the conclusion that many automatic gratuities are not really gratuities, but rather they are service charges. They determined this because the customer doesn’t really have a choice on whether to leave the gratuity or not.So as of January 1, that common automatic tip for bottle service in a nightclub or for large parties at a restaurant will now be considered a service charge.

How is this going to effect the staff at Vegas pool parties?

This new IRS law can effect the Las Vegas hospitality industry in the following ways!

  1. The service staff will need to wait for that money to come on a paycheck instead of taking the cash home that night.
  2. The money will be taxed as a wage instead of a tip, which brings no added tax burden for the server. But there is a behind-the-scenes impact from this seemingly small change that could get ugly.

Because a service charge must be recorded as a wage, restaurants and clubs lose out on Medicare and Social Security tax credits that came from money that was logged as a tip. Plus, payroll paperwork gets complicated, as this new wage money needs to be factored into an hourly wage that will fluctuate weekly based on the number of these new service charges reported.

Possible Auto Gratuity Changes

There are some venues in New York City that are just paying higher hourly wages to the service staff and in turn raising the prices on their food that will include a service fee. Changes like these in Vegas pool parties would surely have an impact on income for servers that are heavily reliant on these high-dollar auto gratuities.

We will see how this new rule changes the service industry in Las Vegas!

Read more about this topic in The Death of the Auto-Gratuity by Brian Sodoma.

What do you think?

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  1. Autogratuity, can be a neccearry evil at some establishments. It doesn’t allow people to change the tip fee to a lower amount and leaves the server free to provide any service knowing they are guaranteed a percentage of the bill. Who is to blame for this, the customer or the server?

    The new rule says that automatic tips are considered regular wages and so they’ll be taxed. That means servers won’t see their tip money until they get their paycheck.

    Autogratuity was originally made up to make sure that servers were compensated for the service provided. Especially when liquor is involved it is common for a patron to forget to leave the tip and just to sign on whatever was owed. As time went on more and more servers (not all servers) took advantage of this policy and would simply underserve a patron knowng they would be guaranteed a tip.

    The main issue with autogratuity is that it is not negotiable. Since this is the case the IRS now says it is not gratuity but should be considered a service fee. We have always supported suggested tips on the bottom of receipts. Customers decide what they should leave as a gratuity. It leaves it in the customers hands to give a proper amount of tip for services rendered.

    Historically, a tip used to be an incentive reward for outstanding service provided. Unfortunately, it has become something that the servers have to count on in addition to their salary. We have friends in states that their wage are less than the minimum wage because they are expected to receive tips. Thus, the establishment gets around the minimum wage laws. A tip shouldn’t be expected as a part of salary, but an incentive reward for hard work and exceptional service. Note to employers: Pay your employees what they deserve and don’t make them rely just on gratuities.

    Noteworthy, the new rule does not get rid of automatic gratuity at restaurants. Restaurants are simply doing away with automatic gratuities or service charges completely. ”Automatic gratuities” would now have to be called “service charges” and counted as income to the establishment rather than gratuity to the employee.

    The difference is in the accounting of the income and how the taxes are levied by the IRS. It’s significant as a “service charge” would go through the establishment’s taxes and would not reach the employee unless the establishment paid the employee through their paycheck. That is after the establishment paid taxes upon that income as well as any withholdings for the employee’s pay.

    The previously used process of an “automatic gratuity” would be paid directly to the employee and they would account for that on their personal taxes. This is no longer allowed by the IRS.

    This impacts restaurants across the country and they knew it was coming. The IRS made the rule in 2012 and gave them all of last year to prepare for the changes.

    Establishments should abide by the current laws and regulation, but they should make sure the service industry professionals do not suffer. Jordan & Marks believes in fair pay and great service for all. What are your thoughts? Let us know!

  2. Autogratuity, can be a neccearry evil at some establishments. It doesn’t allow people to change the tip fee to a lower amount and leaves the server free to provide any service knowing they are guaranteed a percentage of the bill. Who is to blame for this, the customer or the server? The new rule says that automatic tips are considered regular wages and so they’ll be taxed. That means servers won’t see their tip money until they get their paycheck. Autogratuity was originally made up to make sure that servers were compensated for the service provided. Especially when liquor is involved it is common for a patron to forget to leave the tip and just to sign on whatever was owed. As time went on more and more servers (not all servers) took advantage of this policy and would simply underserve a patron knowng they would be guaranteed a tip. The main issue with autogratuity is that it is not negotiable. Since this is the case the IRS now says it is not gratuity but should be considered a service fee. We have always supported suggested tips on the bottom of receipts. Customers decide what they should leave as a gratuity. It leaves it in the customers hands to give a proper amount of tip for services rendered. Historically, a tip used to be an incentive reward for outstanding service provided. Unfortunately, it has become something that the servers have to count on in addition to their salary. We have friends in states that their wage are less than the minimum wage because they are expected to receive tips. Thus, the establishment gets around the minimum wage laws. A tip shouldn’t be expected as a part of salary, but an incentive reward for hard work and exceptional service. Note to employers: Pay your employees what they deserve and don’t make them rely just on gratuities. Noteworthy, the new rule does not get rid of automatic gratuity at restaurants. Restaurants are simply doing away with automatic gratuities or service charges completely. ”Automatic gratuities” would now have to be called “service charges” and counted as income to the establishment rather than gratuity to the employee. The difference is in the accounting of the income and how the taxes are levied by the IRS. It’s significant as a “service charge” would go through the establishment’s taxes and would not reach the employee unless the establishment paid the employee through their paycheck. That is after the establishment paid taxes upon that income as well as any withholdings for the employee’s pay. The previously used process of an “automatic gratuity” would be paid directly to the employee and they would account for that on their personal taxes. This is no longer allowed by the IRS. This impacts restaurants across the country and they knew it was coming. The IRS made the rule in 2012 and gave them all of last year to prepare for the changes. Establishments should abide by the current laws and regulation, but they should make sure the service industry professionals do not suffer. Jordan & Marks believes in fair pay and great service for all. What are your thoughts? Let us know!

    Cheers,

    Jordan & Marks

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