You’ve seen those posts asking for unpopular opinions, right? Well, here’s mine: we should keep taxing tips or eliminate tipping altogether.
Hear me out.
I’m not against tipping for good service or spending your hard-earned money as you choose. I am talking about consumers subsidizing the hospitality industry’s payroll.
Minimum Wage
The federal minimum wage is $7.25 an hour as of now. Currently, in Nevada workers are paid at least $12.00 an hour whether the role is tip-based or not. In states such as Georgia and Kentucky, the minimum cash wage for hospitality (tip-based workers) is $2.13 an hour!
Doesn’t that sound crazy?
Well, according to the Fair Labor Standards Act of 1938—86 years ago—it’s perfectly legal.
Making up the difference
If the server’s tips do not meet the minimum $7.25 an hour, the restaurant is “on the hook” to pay the difference between what they earned and the minimum wage.
I understand that hospitality staff in high-end restaurants, clubs, and steak houses can easily exceed this number.
But think about your servers at Dennys, Yard House, IHOP, and other typical family restaurants. These servers rarely see large tips.
When are our tips true rewards vs subsidizing the hospitality worker’s pay? Again, I remind you Nevada has a $12.00 hourly minimum wage.
Automatic Gratuities
And while we are at it, let’s talk about auto gratuities (grats).
Auto grats are understandable on parties with over six people. However, more and more, we see auto grats being added for parties of six or fewer. I had a friend visit, and we went to a major hot spot off the Strip and paid an auto grat for our party of three! We had appetizers, two beers, and four non-alcoholic drinks during happy hour. I didn’t even catch it; my friend did, as I was about to tip on top of the total bill amount.
With auto grats, the assumption would be, and rightly so, that the money would go to the server. But that is not always the case.
While tipping is optional, an auto grat is considered a service fee. According to the IRS standards, auto grats fall under the business’s gross receipts.
Taxing tips
Right now, the system is based on voluntary reporting. Hospitality workers report their tips on their checks, and employers withhold applicable taxes. Not slinging any mud, but I have yet to meet a hospitality worker who reports 100% of their cash tips, even 80% of the time.
I work, earn my paycheck, and pay taxes on said check. Then I tip the server who “earned” that money; how is that not considered income? My income was taxed, shouldn’t theirs be as well?
Now, maybe you can argue this point if the cash minimum wage is ridiculous, like $2.13 an hour, but once minimum wage is obtained, those tips supplement the server’s income.
I told you this wasn’t a popular opinion. And to my servers in Vegas, I love you, and I tip well.
The argument
The other side of the argument is that restaurants say they can’t pay servers the federal minimum wage because it would make food too expensive, and people would stop patronizing the restaurant. However, we see that as of September of 2024, dining out is on the rise, inflation and all! So, why are we more concerned with protecting the profit margins of the restaurant over paying employees fairly?
So, if you have stuck with me so far, here is where it gets hairy.
Business overhead
As a business owner, I have overhead. However, I don’t expect my clientele to help me meet payroll.
Overhead shrinks and grows; that is what happens when you are in business. Business strategies adapt, however you don’t charge more for food AND still expect wage subsidy from your patrons.
Am I wrong?
Bottom Line
We have seen movement on the minimum wage front, and many states like Nevada are leading the way.
Rewarding people for good service is not the same as subsidizing a restaurant’s bottom line, and we need to stop confusing the two.
