Based on rules that took effect in January, the IRS requires employers to pay FICA tax on the service charges it collects.
An example of how tipping has become a dining out expectation rather than an option, the mandatory "service charge" most establishments tack onto large group checks has been in the news lately.
Earlier this year, at an Applebee's restaurant in the St. Louis area, an annoyed patron responded to a mandatory tip by crossing out that amount and writing in "I give God 10%, why do you get 18?"
Subsequently posted by an Applebee's employee (who was fired for doing do), the guest check and the notation on it went viral, creating a good deal of negative publicity for all involved -- the customer, the employee, and the restaurant chain.
More troubling than a clever turn of phrase, however, is a recent Internal Revenue Service opinion that now treats such mandatory "tips" as service charges.
Based on rules that took effect in January, the IRS requires employers to pay FICA tax on the service charges it collects.
Tips, the IRS asserts, are "free from compulsion" and made with the customer having an "unrestricted right to determine the amount."
Most tax experts agree, therefore, that such language makes those 18 or 20-percent levies on large groups into service charges, no matter how strenuously a restaurant tries to label such a charge a "tip."
Moreover, the IRS has further ruled that redistributing such mandatory tips to servers does not absolve the employer of the FICA tax liability those charges incur.
Perhaps it's time to rethink the whole practice of tipping. Pay servers a fair wage and charge menu prices that reflect all the costs of preparing and serving a restaurant meal.
In the end, everyone will probably be happier with the result.
Hugh Robert is a faculty member in Holyoke Community College's hospitality and culinary arts program and has over 35 years of restaurant and educational experience. Please send items of interest to Off the Menu at the Republican, P.O. Box 2350, Springfield, MA 01102; Robert can also be reached at OffTheMenuGuy@aol.com