Monday, May 11, 2009

HFF Reexamines: The Tax Question

EaterLA linked to this article in Bon Apetit regarding tipping on takeout and delivery. I agree wholeheartedly on takeout: tip a couple bucks, regardless of price. The author's opinion on delivery is also good, 15%-20%. Though I'd bump that down toward 15% on the scale actually as a delivery driver is, generally, tipping out much less than a server at a sit down restaurant. A server is going to tip out 20%-40% of his gross tips in a given night, a driver very little if any.

But here again that canard of tax comes into play: "at least 15 to 20 percent of the check before tax," he writes.

You should tip AFTER tax. Always. Here's why: a server has to pay taxes based on GROSS sales. Because of years of service staff underdeclaring tips and restaurants turning a blind eye, the IRS set a benchmark a several years ago of a minimum assumed tip income of 8% of gross sales, information which the restaurant has to provide as part of its payroll accounting. Not net sales, gross sales. Gross sales include tax.

So if a server grosses $200,000 in a year, the IRS will assume a minimum tipped income of $16,000 on top of his or her wage income for the year. When you factor in tip-outs and (in some cases) credit card service charge deductions, you get a situation where if you tip less than 10% the server is at best breaking even, at worst losing a bit of money.

That distracts from the main point, though: why does a small fraction of a small fraction matter? I know sales tax went up, but not by much. The difference between tipping before and after tax is the difference of 9.25ish% of whatever percentage you were planning to tip. A 20% tip? It's a difference of 1.85% of the total bill. Assume you have a $200 (before tax) tab. A 20% tip would be $40 before tax or $43.70 after.

You're really going to squabble over $3.70? And that's on a sizeable tab. More importantly, are you really going to squabble over $0.37 on a $20 tab? It's not a procedural issue, it's a generosity issue. When I go out (restaurants, bars, hotels, cabs) I smile, say thank you, and tip generously. I don't make a lot of money, but I'm probably making a bit more than whoever's serving me (or maybe not). And those few extra bucks I spend in gratuity come back to me in the form of better service, room upgrades, neighborhood discounts, and free drinks. It takes time to build those relationships, but they pay off.

So here's HFF's ironclad rule for tipping: for competent, attentive service tip at least 20% after tax. Only for egregiously rude service should you tip less than 15%. Period. When in doubt, round up. Those extra pennies will come back to you, as the no doubt racist idiom goes, "in spades."


Kenny said...

Zack said...

I've never ever heard anyone say "in spades" had any racial connotations (I assumed the origin Kenny linked to), and after reading this post and the page Kenny linked to I still had to go to Urban Dictionary to figure out what the hell the racial angle was supposed to be.

As for tipping, no offense, but anyone who stands to gain materially from higher tips is untrustworthy on the question of how much to tip, just like Wall St. is untrustworthy on the matter of how much regulation they require and children are untrustworthy on the matter of how much money they need to bring on a field trip, and professors are untrustworthy on the matter of whether they need tenure. Now, I do think professors need tenure, but I don't think it because professors say so.

I know that, whatever tipping's arbitrary and condescending cultural origins ("here's a penny [to assuage my guilt in benefiting from the existence of a helpless underclass]"), it's a collective action problem we're stuck with. In many states (though not Calif., right?) servers are paid less than minimum wage, and you can't withhold tips in this scenario without moving the most vulnerable people in this situation (your servers) closer to poverty.

So we put up with tips because it is the only ethical choice for the individual to make here, but I do object to it being periodically redefined upwards by self-interested restaurant staff (not that there's anything wrong with self interest, and not that they don't work hard) and douche bags trying to demonstrate to their dates how awesome their Big Swinging Dicks of Generosity are. Tipping on taxes doesn't even make sense. It's just an opportunity to squeeze out more money because the number's handy, and therefore it's easy to convince people that they should pay attention to it. How long before the tip iterates, and we need to tip on the amount of the tip?

David J.D. said...

I actually didn't look up where "in spades" came from. I was just being flippant.

It's a chicken and egg thing here as to the whys and hows tips increasing.

You're correct that some states (but not California) do pay below minimum wage for tipped staff (as low as $2.85/hr I think).

We can argue the finer points of tipping going up, but the whole pre/post-tax debate is, I think, meaningless.