Do your restaurant menus still say “a gratuity of 18% will be added for parties of 8 or more”? How about your room service menus, bar menus for bottle service, banquet event order forms, private dining contracts, or buyout contracts? Do any of them still provide for automatic gratuities?

If so, as of January 1st there are two important consequences:

First, under a new IRS rule, such automatic gratuities are no longer viewed as truly discretionary, and will be taxed as non-tipped wages.

Second, such automatic gratuities will be considered service charges, and must be included in the regular rate for overtime pay. This means that an employee’s regular rate of pay can vary from week to week, resulting in a payroll nightmare and a heavy administrative burden (not to mention liability if you can’t get the calculations exactly right).

What should you do? One option endorsed by the IRS is a guest check that displays sample tip calculations of 15%, 18% and 20% on customer receipts, but leaves the tip line blank. This is viewed as preserving the discretionary nature of the tip.  Many large restaurant chains have endorsed this option and eliminated automatic gratuities.

Therefore, before the end of the year, take a look at all of your menus, contracts, guest checks, and POS systems, and make sure you have reprinted or reprogrammed them to eliminate automatic gratuities. If you fail to do so, get ready for a possible payroll tax audit and some very complicated overtime calculations!