Question:
We historically have used a service charge to offset payroll expenses. As an off-premise catering company, how do we state this included charge to comply with the new [automatic gratuity] standards?
– Caryn Hasslocher, CEO, Fresh Horizons Catering, San Antonio, TX
Answer:
Since writing about the new IRS regulations treating automatic gratuities as service charges a few weeks ago, a number of related questions have arisen.
The main change in automatic gratuity (auto grat) reporting is that if you automatically add a gratuity to a bill, it is considered a service charge and is subject to FICA and other taxes, as Restaurant Business has previously reported.
In your case, as a caterer who has already been using service charges, you have likely been paying these taxes already. The transition from auto grat to service charge shouldn’t have any impact for you. That said, if you have been treating your service charge as a gratuity, you will now need to handle it the way you would your other payroll expenses. As a caterer who relies on the service charge for a large portion of payroll, I would certainly not recommend going to an optional gratuity model as many restaurants are doing to weather the auto grat change.
The specific legal language of the change can be found here.