Automatic gratuities can lead to tax woes, according to accountant Michael Rasmussen.
The IRS may be suspicious of any failure to record automatic tips as part of the total sale in your POS records.
Q: Do you have any advice about dealing with automatic gratuities and applicable taxes?
A: I recently worked with a restaurant that underwent a tax audit covering the previous three years. The operator uses a point-of-sale (POS) system to account for his daily operations and for monthly sales tax calculations.
One item covered in the system’s daily sales report is “auto gratuities.” According to the restaurant’s policy, parties of eight or more guests are charged an automatic gratuity (a certain percentage of the total check). Servers are required to point out the automatic gratuity to customers before taking the order to ensure that the customers agree to this charge before moving ahead with the order. The server then receives the entire tip as cash and must enter it into the POS record as an “auto gratuity.”
Here’s the problem: According to the tax laws of the state in which this restaurant is located, automatic gratuities must be listed as part of the total sales amount for that order and are considered taxable. If the server fails to enter the automatic gratuity as part of the total sale, the transaction can later be flagged as questionable in an audit. It may have been an honest mistake, but that doesn’t really matter to the taxing authorities.
It’s the little things that can add up in your tax records and lead to problems in an audit. When an auditor reviews your sales records, he will use your POS system as a road map. If he finds discrepancies, you may be considered noncompliant. Thus, it is crucial that you fully review your POS Daily Taxable Sales formula to determine that all items are in compliance with your state’s reporting requirements. This will prevent costly surprises in an audit.