In the retail food and drink industry, particularly restaurants and bars, there is an age-old tradition which is recently coming under fire and scrutiny from some states: the tipping system. There are many stigmas and expectations that revolve around tipping a server or bartender, and they come from both sides of the coin.

Most servers expect to be tipped for their service, and in many cases this is a justified expectation considering that their hourly wages may be very low in order to offset the money they take in from tips. Most patrons feel obligated to tip their servers, out of tradition if nothing else. As legislation is being considered in some areas that, if passed, is sure to spread throughout the country, it may be time to reconsider your policy on tipping.

A Short History of the Tipping System

Paying a gratuity to a server isn't as old a practice as you may think, especially in the U.S. Although there is no hard, documented evidence that gives us a concrete beginning to the practice, the common belief among historians is that it began in 16th century England as a practice by patrons "to insure promptitude" (t.i.p.), in other words to make sure that they got the attention they thought they deserved from their server.

This didn't find it's way to the U.S. until after the American Civil War, in the late 1800s. Travelers abroad picked up on the habit in Europe and brought it back with them. Shortly after it began taking hold in society here, there was a powerful movement to ban it. The arguments then had nothing to do with taxes or the economy at all. Instead, opponents of tipping claimed that it was contrary to what our country was founded on. In their opinions, tipping a server was a way of differentiating between them and the patron in a way that was far too reminiscent of the British aristocracy for their tastes. America was supposed to be a country which didn't create upper and lower classes, but where "all men are created equal". They viewed the whole tipping system as demeaning to the server.

Regardless of where it came from, the tradition of tipping has been well-ingrained in our culture. This may not be the case in the future, however, and there are good arguments on both sides of the issue.

A Difficult Dilemma

As a restaurant owner you are obviously aware of the current IRS regulations for reporting tips, which is that they allow you to report up to 8% of an employee's tips as tips on your behalf. It is practically impossible for an employer to know exactly how much their employees receive in tips, even if they require the employees to report daily on how much they take in. Cash will always slip away into pockets unreported. Tips which are added to a credit or debit card receipt are the owner's best friend when it come to tracking tips, but you can't require your patrons to pay with them.

According to the IRS official numbers, there was over $14 billion paid in tips in 2000, and to say that this is a low number is probably a gross understatement. With that kind of revenue at stake, it's no wonder that some states are looking into ways to get a piece of the missing action.

The Battle Brewing

In May of this year, New Hampshire became a battleground for the possible changes that may be coming in the tips and taxes arena. The Department of Revenue Administration for New Hampshire began sending out audit letters earlier this year stating that owners were required to pay their Business Enterprise Tax not only based on hourly wages (which average around $3.73), but on tips as well, which could easily double the tax burden.

State Senators who side with industry associations have put forth legislation that would prevent this from happening, claiming that the income is not paid by the employer and therefore they should not be responsible for taxes on it.

What To Do?

Business owners will likely soon need to make some decisions regarding tips and taxes, but the answer as to the best route to go is still unclear. One restaurant in New York City has recently made the decision to ban tips in their establishment, which has been met with mixed emotions and some initial confusion by patrons. Instead they have placed their employees on a salary with paid vacation and sick leave, and raised prices to offset the additional payroll costs.

From the perspective of diners, the difference is strange at first but pleasant in the end. As a high-end establishment, the servers are accustomed to getting 15-20% tips, but while the amount of the price increase wasn't disclosed, it is doubtful that it exceeded this percent. This leaves diners paying either roughly the same amount or less, while the employees don't have to worry about poor or low tippers or if things like weather put a damper on business one evening.

When it comes to business, traditions are things that sometimes must be left behind. This isn't to say that abolishing the practice of a tipping system is necessarily the answer, but it's on the table of discussion. Doing the right thing for your customers and employees should be of paramount importance if you want to stay in business, but with increasingly confusing rules and regulations regarding tipping you need to also make sure that you will still be in business to serve them.

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