Tasty Financial Lessons from Restaurants

Published September 2, 2014

If it’s irked you that restaurants have told you that you must tip – and tip a certain percent – when you are with parties of six or more, then you can feel grateful to the Internal Revenue Service for a change.

The IRS has decided that such automatic tips should not count as tips but instead as service charges, meaning that many restaurants are doing away with automatic tips.

The IRS ruled that a tip involves a person having the independence to choose – not only whether to tip but also the amount of the tip – and automatic tips do not allow any such independence for the customer. Under the ruling, automatic tips now are taxed as wages, and payroll tax withholding comes into play. This means extra paperwork for restaurants, among other things. (The ruling was actually made in 2012 but is only now being implemented.)

Many restaurants have decided not to go that route, so many are dispensing with the automatic tips. Instead, you will notice that at many restaurants, the bill comes preprinted with “suggestions” for tip amounts. Those amounts are already figured for you at the bottom of your bill.

You may think that the only thing that restaurants and lawyers have in common is that lawyers like to eat and restaurants serve food that lawyers like to eat. But, in reality, the true commonality is that both are businesses. And because both are businesses, both must respond to whatever new regulations affect them.

New regulations affecting lawyers are implemented often. Sometimes the choices regarding incorporating those regulations are few; other times, as in the case of automatic tips, there are two or more diverse routes that legally fulfill the new mandates.

The important takeaway from all of this is that things won’t always stay the same. When faced with new regulations affecting your firm, you will have to evolve – and you should evolve in such a way that you optimize your business.

Categorized in: ,

Audience type: Associates, Small Law Firms