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Tipping concepts

Auto-Gratuity

Also called: automatic gratuity, large party gratuity, 18%/20% for parties of 6+

An automatic tip-like charge added to a bill (often for large parties) — IRS treats it as a service charge / wages, not a tip.

Auto-gratuity is a fee a restaurant automatically adds to a customer's bill, traditionally for parties of 6 or 8 or more. Common rates: 18%, 20%, or 22%. The charge is non-negotiable from the customer's perspective.

Despite the name "gratuity," IRS Rev. Rul. 2012-18 reclassified auto-gratuities as service charges starting January 1, 2014. The legal effect:

  • The portion paid to the server is W-2 wages, not tips. FICA is withheld at payroll.
  • Cannot count toward the tip credit. The employer must pay full minimum wage for hours covered by auto-gratuity income.
  • Counted in the regular rate of pay for overtime purposes.
  • The employer pays the employer share of FICA (which they don't do on actual tips).

Because the bookkeeping is more complex and the wage cost is higher, many restaurants stopped using auto-gratuity after 2014 and switched to optional "suggested gratuity" lines (like 18%/20%/25% bubble options) that customers can decline. Suggested gratuities, being voluntary, remain tips for tax purposes.