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Auto Gratuity: Understanding and Implementing Service Charges

16 Feb 2024

Automatic gratuity can be a real lifesaver in certain spots, like when you're dealing with separate checks, big events, or a gaggle of hungry guests (think 6 or more). But before you jump into setting up auto gratuity through your restaurant POS system, there are some legal bits you'll wanna sort out.

So we're giving you the 411 on all things automatic gratuity. We'll explore:

  • What automatic gratuity means.
  • The lowdown on whether auto gratuity is actually legal.
  • How to report these automatic tips to the IRS.
  • Tips for handling gratuities when dealing with those big dining crews.
  • Whether customers can dodge automatic gratuity charges.
  • Alternatives to the usual tipping and auto gratuity setup.
  • How to actually get this new service model rolling.

Let's get started.

Auto gratuity vs service charge

It's crucial to grasp that despite being termed a gratuity, according to the IRS in the US, automatic gratuity charges are classified as service charges. The IRS makes a clear distinction between tips and service charges:


  • Customers can't be compelled to pay them.
  • Customers get to decide the amount.
  • They're not the result of negotiations or determined by policy.
  • Customers decide who receives the payment, usually the server.

Service charges:

  • Automatic gratuities added to large dining parties.
  • Fees for banquet events.
  • Charges for cruise trip packages.
  • Charges for hotel room service.
  • Bottle service charges.

Is automatic gratuity legal?

Now it's time to talk about automatic gratuity laws. The answer to the above question? Absolutely, automatic gratuity is legal in the United States. It's commonly included on bills in specific situations, such as when there's a large party at a restaurant or in upscale or specialized service settings. The purpose of automatic gratuity is to ensure that service staff receive a fair tip for their efforts, particularly when serving a sizable group of people.

However, it's worth noting that there could be regional differences and specific state laws that impact how automatic gratuity is applied. For example, certain states might have regulations regarding how these charges are disclosed to customers, and there could be variations in tax implications for automatic gratuity compared to voluntary tips.

How do I report automatic gratuities to the IRS?

When it comes to reporting automatic gratuity fees to the IRS, it's important to note that they aren't handled in the same manner as tips. Any portion of the fee allocated to restaurant employees is considered non-tip wages and is subject to tax withholdings along with other filing requirements.

Despite automatic gratuity being included, many restaurant bills still feature a standard tip line, giving guests the option to tip their server separately if they wish.

Typically ranging from 15-18%, auto gratuities provide a base amount, but guests who prefer to tip more (say, 20% or even 25%) can do so by tipping on top of the automatic gratuity. Any additional amount tipped directly to the server is treated as regular tipped income and should be reported accordingly, just like any other tipped earnings.

Can restaurants charge automatic gratuity?

While the rules for reporting gratuities are set by the IRS, state laws can also impact how automatic gratuity is handled at the state level. On a federal level, it's legal to charge automatic gratuity, but the way it's reported on taxes can vary from state to state.

For instance, California has its own laws regarding how service charges are taxed, which closely align with federal laws (actually, California's laws predate federal regulations). If you're considering implementing automatic gratuity, it's wise to check your state laws regardless. It's better to be cautious and ensure compliance.

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How can restaurants handle large party gratuity?

Dealing with large party gratuity, which often involves automatic gratuity, requires some thoughtful strategies. Here's how restaurants can navigate this:

  • Establish a clear policy: Make sure your gratuity policy for large parties is crystal clear. Display it on menus, websites, and communicate it during reservations. Transparency prevents surprises when the bill arrives.
  • Enhance staff training: Ensure your staff is well-equipped to handle large parties efficiently and professionally. Great service can boost tips, even when gratuity is automatically included.
  • Implement tip distribution policies: Have transparent policies in place for distributing gratuity among your staff. This not only boosts staff morale but also ensures fair tip distribution.
  • Set up feedback channels: Provide customers with avenues to share feedback on their experience. This feedback is invaluable for improving service quality and addressing any auto gratuity-related issues.
  • Agree on event arrangements: For events like banquets or weddings, consider including automatic gratuity in the overall pricing package. This simplifies billing and offers clarity regarding costs upfront.

By implementing these measures, restaurants can effectively manage gratuity for large parties, ensuring a smooth and satisfactory dining experience for both customers and staff alike.

Do customers have to pay automatic gratuity charges?

You might recall the 2013 incident where a pastor in Missouri refused to pay the automatic gratuity charge added to his table's bill at Applebee's for a large group. Instead, he scribbled on the check, "I give God 10%—why do you get 18%?" as reported by Forbes.

However, the law wasn't in the pastor's favor. According to a columnist at the Belleville News-Democrat, "Restaurants are still free to charge a mandatory fee if they wish."

This refers to the IRS's change in how automatic gratuity is reported, effective January 1, 2014. Prior to this, many restaurants treated automatic gratuities as tips. If you're considering implementing an automatic gratuity policy, some customers might still view the charges through pre-2014 lenses.

If you're uncertain about whether automatic gratuity is suitable for your restaurant, consider consulting your service staff. They'll likely have valuable insights on what works best for them. Additionally, most POS systems allow auto gratuity to be applied at the server's discretion, empowering them to serve their tables effectively.

Alternatives to traditional tips and automatic gratuities

Navigating the landscape of restaurant gratuity is evolving, with various options emerging beyond traditional tipping and automatic gratuity policies. Here's a look at some alternatives:

  • Tip sharing: Recent adjustments to the Fair Labor Standards Act now allow for tip sharing between tipped and non-tipped employees in many states, particularly where employers are required to pay employees minimum wage. While some states like Massachusetts have restrictions, this option enables back-of-house staff to benefit from tip pools alongside front-of-house colleagues.
  • Service charges: In response to changing regulations and customer preferences, some restaurant owners are turning to service charges, typically ranging from 15-22%, as an alternative to automatic gratuities. With service charges, owners retain control over income distribution, as long as they transparently disclose how funds are allocated, aligning with federal and state laws.
  • Service fees: As a more modest alternative to service charges, service fees help offset the costs of providing exceptional dining experiences, especially in heavily regulated areas. By incorporating a service fee into the bill, restaurants can ensure fair compensation for their staff while adhering to labor laws and legal requirements.
  • Service-included model: Rather than itemizing charges separately, some establishments are opting for a service-included model where service costs are integrated into menu prices. This approach, common in many international dining scenes, guarantees fair wages, benefits like health insurance, and paid leave for employees.

Incorporating these alternatives requires careful consideration of federal and state laws, customer preferences, and internal restaurant policies. By exploring diverse gratuity models, restaurant owners can ensure fair compensation for their staff while providing exceptional service to customers.

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How to implement a new service model

Transitioning to a new service model requires effective communication with both employees and customers. Here's a breakdown of steps to successfully implement a new approach:

  • Employee engagement: Start by engaging with your staff to explain the reasons behind the change and how it will benefit them in the long run. Encourage open dialogue and address any concerns they may have about transitioning away from traditional tipping or automatic gratuity policies. Providing training and support during the transition period can help employees adapt to the new model more smoothly.
  • Customer education: Communicate transparently with your customers about the upcoming changes to your service model. This is particularly crucial if your establishment caters to tourists or other non-regular populations who may be unfamiliar with alternative gratuity systems. Utilize signage, menu inserts, and staff interactions to educate customers about the new approach and why it's being implemented. Be prepared to answer questions and provide reassurance to customers who may be hesitant about the change.
  • Consistent messaging: Ensure that all communication channels, including in-person interactions, social media, and your website, convey a consistent message about the new service model. Consistency helps build trust with both employees and customers and minimizes confusion about how gratuities will be handled moving forward.
  • Feedback mechanisms: Establish feedback mechanisms to gather input from both employees and customers throughout the implementation process. This allows you to address any issues or concerns promptly and make adjustments as needed to ensure a successful transition.
  • Flexibility and adaptability: Recognize that transitioning to a new service model may involve some trial and error. Stay flexible and be willing to adjust your approach based on feedback and evolving customer preferences. By remaining adaptable, you can fine-tune your service model to better meet the needs of both your staff and your customers.

Implementing a new service model, especially one that deviates from traditional tipping practices, can be challenging. However, by prioritizing effective communication, engaging with stakeholders, and remaining flexible, you can successfully navigate the transition and create a positive experience for both employees and customers alike.

Epos Now Gratuity

The Epos Now Gratuity app offers a seamless solution for adding tips to customer transactions directly through the Epos Now till or integrated card reader. Here's a closer look at its key benefits and features:

  • Flexible gratuity processing: Easily process gratuity on transactions as either a percentage of the total bill or a specific amount, providing flexibility for both staff and customers.
  • Convenient access: The Gratuity app is readily accessible via the Front Till, ensuring effortless integration into your existing transaction workflow.
  • Versatile payment options: Gratuity can be added to both cash and card tenders, including transactions processed through integrated card readers, accommodating various payment processing preferences.
  • Transparent reporting: Gain clear insights into gratuity transactions with comprehensive reporting available within the Back Office, enabling better management and tracking of tip amounts.

With the Epos Now Gratuity app, enhancing the transaction experience for both staff and customers is simplified, ensuring seamless gratuity processing and transparent reporting for improved operational efficiency and customer satisfaction.

Our final tips!

So there you have it, folks! Our complete guide to auto gratuity! We’ve given you the lowdown on everything from its legal implications to practical tips for getting it up and running smoothly in your restaurant. We've covered all the bases, so you can dive into the world of automatic gratuity with confidence.

From understanding the difference between tips and service charges to navigating IRS regulations and state laws, we've got you covered. No need to stress about whether you're doing things right – we've laid it all out for you.

And hey, we've even introduced you to the Epos Now Gratuity app! Imagine being able to handle tips seamlessly, right from your Epos Now till or integrated card reader. It's like having your own personal gratuity assistant, making sure everything runs smoothly behind the scenes.

So, whether you're dealing with separate checks, hosting a big event, or just want to make sure your hardworking staff get their fair share, automatic gratuity could be the solution you've been looking for. And with our guide and the Epos Now Gratuity app by your side, you'll be well-equipped to tackle it all like a pro.

Ready to take your restaurant to the next level with automatic gratuity? Dive deeper into our additional resources to discover more tips and tricks for maximizing your restaurant's success. Learn how to get more tips working as a server, enhance ways to improve customer satisfaction in a restaurant, and streamline your operations with pre-authorization for your restaurant. Let's make your restaurant thrive!

Ready to elevate your hospitality business? Contact our team today for a seamless POS solution tailored to your needs!

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