FOR IMMEDIATE RELEASE

Independent Restaurant Coalition Applauds Introduction of Restaurant Service Charge Tax Fairness Act

Washington, D.C.  [May 15, 2024]–Today, Congressman Earl Blumenauer (D-OR) introduced the Service Charge Tax Fairness Act to help small businesses, like neighborhood restaurants and bars, better navigate the challenges of the industry. The Independent Restaurant Coalition (IRC) applauds this legislation, which would treat service charges like tips and provide an avenue within the tax system for independent restaurants and bars to adapt to a changing environment.

Restaurants have historically paid servers, bartenders, cashiers, and delivery drivers, with an hourly wage plus tips that are provided at the discretion of the diner.  Chefs, line cooks, dishwashers and other “back of house” staff are generally paid a flat hourly wage. In independent restaurants and bars, the tipping system often means that customer-facing workers have a much larger take-home pay than their colleagues. Tips are treated as income to the employee but not to the employer and are passed through without being taxed.

“A new model is evolving in the industry, charging each check a service fee (typically from 15-23%) that is utilized to compensate employees. This service fee model ensures that employee compensation is fair and not reliant on the diners’ experience. It also creates wage stability,” says Paul C. Reilly, chef/owner of Coperta, Denver, CO.  “While this model is not viable in every market or even in every restaurant, businesses adopting the service fee model face undue burdens under the current tax system. Service charges are treated as regular revenue, subjecting restaurants to taxation on this income.”

Amanda Cohen, chef/owner of Michelin-starred Dirt Candy in New York, instituted a no-tipping model in 2015 and said, “The national movement away from tipping has been gaining momentum during the pandemic. It’s really changing the way people think about work. Restaurants are coming up with new ways to compensate employees that don’t privilege one group over another. Every little breakdown in the system helps.” 

The Service Charge Tax Fairness Act proposes several key measures to address these issues, including:

• Ensure Direct Distribution: Mandate that service charges go directly to non-management employees in the form of wages,

• Tax Exemption: Exclude service charges from FICA taxes, aligning their treatment with traditional tips.

• Cap Exclusion: Implement a cap, limiting the excluded percentage of service charges at 25%, to maintain fiscal responsibility.

• Overtime Exemption: Exclude service charges from the calculation of wages for overtime, preventing double taxation on this income.

“We are grateful to Congressman Blumenauer for his commitment to creating a tool which would provide independent restaurants and bars the tools needed to evolve their business models.” said Erika Polmar, executive director of the Independent Restaurant Coalition. “Recent studies  have exposed the complications of the tipping model  and the challenges posed by the pandemic-induced labor shortage have prompted restaurant owners and operators to explore alternative business practices, such as service charges. The introduction of service charges has allowed restaurants nationwide to adopt innovative business practices, ensuring a more stable, equitable and predictable compensation for their workforce.” 

"This legislation will modernize our tax code to reflect the changing dynamics of the restaurant industry," Congressman Blumenauer remarked. "I am excited to work with the Independent Restaurant Coalition on issues related to immigration, supply chains and especially tax fairness. We must combat discrimination against the tax treatment of those who are working diligently to prioritize equitable compensation for their hard-working employees. I am fighting to create a level playing field.”

ABOUT THE IRC

In March 2020, the restaurant and bar community formed the Independent Restaurant Coalition (IRC) to save the independent restaurants and bars from the devastating impacts of the COVID 19 pandemic. We continue to fight to create meaningful change for independent restaurants and bars nationwide by providing strong advocacy centered on making sure that independent businesses are being seen, heard and supported by federal policy makers.