On January 1, 2014 a new IRS rule took effect regarding automatically added gratuities. It basically states that any gratuities added to guest checks (such as an 18% gratuity added for large parties) will no longer be classified as "tips". It will instead be classified as a "service charge".

This means that it will need to:

• be recorded as business income
• be subject to sales tax
• and later when paid out to the employee, it will need to be treated as wages subject to all the normal payroll taxes

Before this rule, automatic gratuities were classified as tips and it was up to the employee to report the income. After January 1, 2014 - these gratuities will not be available at the time it is charged but instead will later be included on the employees' paycheck and paid out on payday. This will cause headaches for both the employer and the employee.

For the employee, this income will not be available until payday. For the employer, there will be additional payroll taxes to be paid. Another major issue is the new "service charge" which is not counted as a tip for the FICA tip credit. And there will be other consequences related to minimum wage and workmen's compensation insurance premiums.

This will cause most, if not all tipped establishments to rethink the automatic tip "add on", thereby leaving the tipped employee at the mercy of bad tippers. Also, for employees with wage garnishments, there will be more pay available to be deducted to pay those garnishments.