Louisiana automatic gratuity, large parties and sales tax

Large parties are good business and a bookkeeping puzzle. A table of ten that orders a long dinner gives a server a hard night, so many Louisiana restaurants add an automatic gratuity. The check then raises two questions that owners often answer wrongly: is the charge taxed, and who must receive the money? Here are the state's sales tax definitions and the federal rule on service charges. Ask your accountant to confirm the treatment of your own charge.

Is an automatic gratuity subject to Louisiana sales tax?

The state's uniform sales tax definitions, in Title 61 of the Louisiana Administrative Code, address tips and gratuities for restaurants inside the definition of a sale. Tips and gratuities are taxable if the vendor fails to separately list these charges on the check. They are not taxed if they are separately stated and the total collected goes to the employees who prepared and served the food. So two conditions matter: the charge appears on its own line, and the whole amount reaches the staff who earned it.

What does separately stated mean on a check?

It means a line of its own, named for what it is, such as an automatic gratuity of 18 percent for parties of eight or more. A figure folded into a menu price or hidden in a service line with another fee does not meet the description. Set your register so the gratuity line prints on the guest copy and on the kitchen ticket. Print the wording on your menu, your reservation page and any large party confirmation, so the guest knows about it before ordering. Clear notice is good for guests and good evidence if anyone asks later.

What happens if the restaurant keeps part of it?

When the restaurant keeps any part of a tip or gratuity, the entire amount can become taxable. The regulation's own wording, that the total collected goes to the employees who prepared and served the food, points that way. An owner who deducts a share for breakage, a house fee or credit card costs should not assume the gratuity stays untaxed.

Is the gratuity a tip under federal wage rules?

No. The Department of Labor's fact sheet says a compulsory service charge is not a tip. It can count toward the minimum wage and overtime, and it must be included in an employee's regular rate. This matters for payroll. A charge you add and pay out should run through payroll with taxes withheld, not be handed out in cash. Keep it separate from the voluntary tips guests leave, and report both correctly.

How do you set up the pay-out?

Decide the formula before the first large party. Many owners split an automatic gratuity among the staff who worked the table, using hours or a set share for the server, runner and busser. Pay it on the next regular pay day. Record the total charged, the amount paid out and who received it, so the sales tax treatment can be shown from your own records. If a guest disputes the charge and you remove it, record the change and tell the staff.

How should you tell guests?

Be plain and early. Put the percentage, the party size and the words automatic gratuity on the menu. Say it when someone books a large table and again when the party sits down. Do not add a second charge for the same service. A guest who knows what the charge is rarely argues about it, and a guest who learns of it at the end of dinner often does.

How do you handle a private event or a buyout?

A private dinner, a rehearsal party or a full buyout usually comes with a contract, and the contract is where the gratuity belongs. State the percentage, say that it is paid to the staff who work the event and show it as its own line on the invoice, apart from the food and beverage minimum and any room fee. Keep the signed contract with the check. If the host adds a voluntary tip on top, record that separately. Ask your accountant how any room rental or equipment charge on the same invoice is treated, because those lines may be taxed differently from the food.

What should you do next?

Look at the last large party check you ran. Is the gratuity on its own line? Did every dollar reach staff? Was it handled the way your accountant would describe it? Fix any gap this week. Print one sample check with the gratuity line and keep it with your records, so a new manager can see how a large party check should look. Show the same sample to your servers so the wording at the table matches the wording on the check. Then read how tip pooling works, because the same people share in the pay-out.

More guides for your business:

• Louisiana tip pooling and service charge rules for restaurants
• Louisiana sales tax on restaurant meals: state, parish and New Orleans
• How to register and file Louisiana sales tax with LaTAP

More in the US guides for food businesses.