CashoutGlossary / Auto-gratuity
Auto-gratuity
A gratuity the restaurant adds to the bill on its own, often for large parties. The IRS treats it as a service charge, so the part paid to you is wages.
An auto-gratuity is a percent the restaurant adds to the check itself, usually for big parties. The IRS uses this exact case as its example: a menu says an 18 percent charge will be added for parties of 6 or more, and the IRS treats that amount as a service charge set by the restaurant, not a tip. It fails the tip tests because the customer didn't choose to pay it or pick the amount.
What that means for you:
- The part paid to you is wages. It goes through payroll, and it stays out of your tip report and tip log.
- It isn't a qualified tip for No Tax on Tips. The final rules name automatic gratuities among the mandatory amounts that don't qualify, even when they're paid out to staff.
- Anything a guest adds on top of the auto-gratuity is a tip.
There's one carve-out. If the customer is expressly told they can remove or change the amount, including to zero, the final rules say it isn't a mandatory amount. A suggested tip the guest picks freely is a tip; the IRS gives the example of a customer who chose a 15 percent amount free from compulsion.
The common mistake is lumping the auto-gratuity in with your tips when you log the shift. Keep it separate so your tip numbers and your reports match what guests actually chose to give.
Related terms
Service charge · Tip · Qualified tips · Reported tips
