Rethinking the Auto-Grat and How the IRS Views It

server at restaurant

Most restaurants have a policy of adding an automatic gratuity, often called and auto-grat, of 20% or so to large groups. It ensures that servers don’t work their backsides off with a party of twelve and then end up pocketing $1.50. While most customers are fair and generous it seems like much of the time the crankiest, most difficult ones are also tightwads in the worst way. An auto-grat skips the problem entirely.

Or it did.

How the New Auto-Grat Category Affects the Food Service Industry

Starting in 2014 the Internal Revenue Service no longer looks at the auto-grat as a tip. It has reclassified it as a service charge claiming that when a customer is no given a choice about what and how much to leave then it is no longer a gratuity. Here’s how it will affect you.

Restaurant Owners

You will know have the option of either listing the automatic gratuity as a service charge or replace it with a suggested gratuity that still allows the customer to decide how much to tip. So, rather than your automatic gratuity for a party of 10 with a $300.00 bill being $60.00 you will add a blurb that says something like, suggested gratuity 20% ($60.00).

The customer can choose to leave $1.50 if he wants.

The benefit of the second method is that it allows the responsibility for reporting the tip to rest on the server. If you switch it to a service charge then it will have to be recorded as wages which will mean extra paperwork as well as the sum being subject to Social Security and Medicare taxes. It’s quite an added burden for a small business.

Simply leaving the amount up to the customer is risky but it will keep paperwork and expenses at a lower level. Most people will comply with the suggested gratuity, anyway.

Servers and Staff

How things change for servers will depend a lot on how the business decides to handle it. If a gratuity is listed as a service charge then the amount will be added in to the regular check taken home at the end of the pay period. The taxes remain the same so there will be no real change to income unless the server has not been reporting all the tips.

If the employer decides to make it a suggested gratuity then income could potentially be affected by those customers who just don’t tip.


Customers need to realize that a server’s income is mostly tips and that one of the financial responsibilities that one accepts when eating at a restaurant is to tip fairly. Obviously there are times when your server is uncaring, distracted, or inept that you feel that a full tip or any tip at all would be inappropriate but these would be rare. It is more important than ever to plan the tip into your budget when planning to eat at a restaurant.

Servers who are nervous about getting tips will be less likely to want to serve large parties. Restaurants may be less likely to want to seat large parties.

Educate Yourself

It’s important that you educate yourself whether you are a server or a business owner so that you comply with the new laws and regulations. The fines and other consequences for non-compliance can, and will, ruin you financially. Talk to a financial adviser as soon as possible so that you can make the right decision for your business.

Source: News Channel 5

photo credit: Yarden Sachs via photopin cc

- Marye Audet

Marye Audet is an author, freelance writer, and editor. Cooking, baking, and recipe development have been a major part of her life since she baked her first loaf of bread at age 13. Luckily, with a husband, eight children, a son in law, and three grandchildren she has enough test-tasters to handle the steady stream of experiments that come from her kitchen.

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