Beginning January 1, restaurants that add service charges to customer bills were required by IRS regulation to treat the payments as employee wages rather than tips, as most previously had. The employers now must pass the funds through payroll systems and make deductions for taxes and the like before delivering them to their workers. Because that process could take two weeks, the regulation may lead restaurants to violate Massachusetts law.
Under the Massachusetts tips statute, “Any service charge or tip remitted by a patron or person to an employer shall be paid to the wait staff employee, service employee or service bartender by the end of the same business day, and in no case later than the time set forth for timely payment of wages under section 148.” The outer limit for payment might be stretched to 6 or 7 days after a service charge is paid, though most employers remit tips at the end of every shift. Restaurant employees generally expect and rely on the quick payments to gets their money into their own pockets, without deductions, to cover living expenses.
Under prior practice, the money was of course reported by employers to the IRS, but employees were left to declare and pay their own taxes on tips annually. The change in law is apparently aimed at improving tips reporting and increasing tax revenues. In addition to the timing issue it creates for Massachusetts restaurants, the new regulation may add costs and administrative headaches for them. Employer payroll tax obligations may increase, and hourly wages may fluctuate widely from day to day, making overtime calculations difficult. The net effect of all this could be that restaurants will drop the practice of adding service charges to bills, a decision that could in turn cause wait staff to receive less pay. Restaurants commonly add an 18% gratuity to the food bills of larger parties. Whether those parties will voluntarily pay the same tips is an open question.