February 6, 2023
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Region’s restaurants brace for new tip tax


Restaurants across the region are preparing to take a hit from a new Internal Revenue Service policy that will all but end mandatory tipping for large groups of diners.

The changes to taxing practices, which will go into effect in January of next year, will require any mandatory charges such as customary large-party tips at restaurants, mandatory delivery charges and room service and bottle service fees to now be categorized as employee wage earnings, rather than tips earned.

Santa Barbara-based Buynak, Fauver, Archbald & Spray LLP partner Trevor Large said the scheme will have a huge impact on most restaurants that rely heavily on this charge, since wage fees are subject to social security, Medicare and federal income tax as well as the base-pay rate used to calculate overtime wages.

Large said many local restaurants will likely respond by throwing out fixed wage schemes altogether, since the liability they present will no longer be worth the added incentive. Mandatory fees for large parties exist because serving a large group takes much more of the server’s time, an opportunity cost that could go uncompensated unless a mandatory tip is added, he said.

“It will become more difficult for all involved, for both employers and employees,” Large said. “It will be up to the goodness of the public to take care of the server.”

Restaurants that have resolved to continue the alternative tip structure in some way or another, Large said, will do so by implementing strategies of suggesting possible tips to customers. In one such method, servers provide various levels of suggested tips in order to hint at what the server’s work could be valued at.

Large said his firm has focused much of its efforts on the issue towards spreading the word that the changes are happening and making sure businesses are compliant in time for the switch. He said the actual policy compliance is not difficult for employers as long as they are aware of the full extent of what the IRS is asking for.

Mitchell Sjerven owns high-end restaurants Bouchon and Wine Cask in Santa Barbara. He said while the changes will have little impact at Bouchon, it could cause a major loss at Wine Cask, which depends more on these types of fees. Sjerven said he is in talks with financial advisors now in order to hash out an alternative.

“I think its going to be especially problematic for [the Wine Cask],” Sjerven said. “If we don’t suggest the gratuity, my staff won’t be able to get paid.”

He said the policy is also particularly vexing at a state level, where conflicting policies can cause certain fees to be taxed as sales tax as well as as employee wage fees since different organizations have different categorizations. Sjvern said until kinks like these are ironed out, the policy could be more detrimental to businesses than necessary.

While reliance on gratuity tips is widespread, especially in restaurants that depend on providing exceptional service, there are still many who do not subscribe to charging more to large groups.

Among these is Brendan’s Irish Pub, which has three locations in the Ventura County area. Company chief operating officer Shawn Mulchay said because the restaurants do not have any mandatory structures in place, they will face no significant changes from the policy.

A spokesman for Brinker International Inc., the company that owns and operates Chili’s, said in a statement that the chain is believed to be in compliance already, but the company is on the constant look out for updates that might restrict or regulate how employers are allowed to suggest tips. Relevant government boards must decide, based on the potential tip-suggestion plans being looked at, what requirements restaurants must follow in order to not seem too coercive with suggestions.

Large said financial impact aside, policy changes to meet new requirements are extremely simple, but failure to do so could have harsh consequences.  He said business that fail to meet requirements could face anything from an organizational audit to a civil claim or even class-action labor lawsuit, depending on what issue is at stake.