I have always strongly encouraged the use of service charges/automatic gratuities. For those of you that are unaware, an automatic gratuity is a predefined tip that is automatically added to the client’s bill or calculated into the service price, typically 15-20% of the service price.
In this post, I’ll go over the pros, cons, and different ways you can implement automatic gratuity if you choose to do so. I’ll also tell you about the new IRS regulations about how automatic-gratuities are to be classified.
Your staff are guaranteed 15-20% of every service performed.
If you are located in a touristy location, this policy is fantastic since we all have fallen victim to stingy tourists who know they’re unlikely to ever return to the location and feel no remorse about stiffing their service provider.
Clients do not have to calculate the proper amount.
Every so often, you’ll come across a client that will have an internal battle while filling out their receipt. Several of them will outright ask. “What is the right amount? Is 15% enough? Is 20% too much?” Auto-gratuity ends this guessing game once and for all.
You don’t have to worry about whether or not your employees are reporting their tips properly.
If an employee receives cash tips of $20 or more in a calendar month, they are required to report to you the total amount of tips they receive in writing by the 10th of the next month. You are responsible for paying the employer’s portion of social security and Medicare taxes and must collect the employee’s portion of the social security and Medicare taxes and their federal income taxes. (You can see why paying cash tips to employees and under-reporting would be appealing to both salon owners and staff.) If you’re collecting all tips when you collect payment, you will know exactly what your employees were tipped and will be able to tax them and report them appropriately.
Your staff are guaranteed 15-20% of every service performed.
Yeah, the same thing that makes this a pro also makes it a con at times. Your employees know they’re getting tipped regardless. For some employees, this may affect the way they perform their services. However, this point can be argued. You, as the salon owner, are ultimately responsible for ensuring your staff are performing to superior standards. If a professional is slacking, it’s your job to reevaluate whether or not they need to seek employment elsewhere. If you’re managing your staff properly, this con won’t be an issue.
Clients do not have a choice about the amount and may not appreciate the policy.
Some clients do not like being “forced” to pay gratuity. We’ll talk about ways around this in a few minutes.
Ways to Implement Auto-Gratuity
The way I prefer to implement auto-gratuity is to include it in the service pricing and to make it clear to the customers that your salon does not accept tips. This negates the client’s feeling of being forced to tip. For clients that insist on tipping, I would tell them, “We set our service prices appropriately to ensure that our staff are very well-compensated. The gesture is appreciated, but our policy is not to accept additional tips.” Clients loved this policy. The staff loved this policy.
Another way to implement it is to simply put it on your brochures. “An 18% gratuity is automatically added to every bill.” I don’t particularly like this method. For one, this turns the service pricing into a lie. The prices aren’t accurately reflected on your brochures since a compulsory 18% charge is added at checkout. (This is why I also calculate sales tax onto my retail items’ sticker price. Nobody likes to do percentages while shopping.) Some clients may not see this fine print and will argue about it at checkout. This also makes it clear that gratuity is not negotiable, which gives some clients the distasteful impression of compulsory tipping. In my personal experience, when I did use this system, the negative feedback was few and far between. The majority of the clients appreciated not having to calculate anything at checkout or guess at what was “appropriate.” I still prefer the first method, however, since it entirely eliminates the opportunity for argument.
Some businesses give clients the option to choose 15%, 18%, or 20% at checkout, but the only way they’re able to do this is if the client pays with credit or debit. Again, this leaves the door open for debate. However, it does give the customer freedom to choose which amount best reflects the service they’ve received.
Service Charges vs Gratuity
Recently, the IRS distinguished auto-gratuity from “tips.” They now consider auto-gratuity to be a “service charge,” which they consider non-tip wages. They’re still taxed the same way all tips are–they’re subjected to social security tax, Medicare tax, and federal income tax withholding–so nothing has changed. Only the terminology the IRS uses to classify that income has changed (for us, anyways–the food and beverage industry is the only one really affected by this change since the “service charges” cannot be applied to meet the 45B minimum wage requirement the way tips can–but that’s their problem…sorry restaurant people).
The position of the IRS is that if the fixed cost is charged to the customer by the employer, the additional cost is not a tip, but wages. To be considered a tip for tax, four factors must be satisfied: the tip must be made without compulsion, the customer determines the amount at their discretion, the tip is not the subject of negotiation or dictated by policy, and the customer determines which employee receives the tip. Since an auto-gratuity is determined by the employer and mandatory, the auto-gratuity is considered a wage. It’s all semantics where we’re concerned. The IRS can call it whatever they want, but the new legislation changes nothing for our business.
In my opinion, auto-gratuity certainly is a service charge and should be included in all service pricing to supplement your staff’s income without dipping into your salon’s profit. Calculate your service prices and compensation based on your total overhead, then tack on 15-20%, which will go straight to your staff (after taxes). This keeps both of you from getting shorted. There is nothing more infuriating for a professional than putting two hours of diligent work into a gorgeous color job, highlights, a cut and style–just to have the client walk out without leaving a tip because they “don’t have enough money.”
Personally, I have never liked the idea of being tipped.
I’m not a waiter, a bellhop, or a cab driver. I’m a professional providing a service. Our pricing should adequately account for our expenses, cover our salaries, and leave us with a little to put in the salon’s savings. I don’t need to be rewarded for superior performance. Providing a great customer experience and doing the job I’m being paid to do is expected of me without the silent possibility of additional income. Additionally, I don’t like to gamble my financial welfare on the gratitude or generosity of others. I charge what I charge because that’s what I need to pay my bills and keep my business open. Clients–keep your change. Your charity is appreciated, but entirely unnecessary. I see it as being a little bit patronizing. “You did such a great job! Here’s a little something extra.” I get that it’s a nice gesture, but it doesn’t keep me from feeling like a dog being given a treat for good behavior. I realize that my brain is warped and this might just be a weird thing that is exclusive to my twisted psychology, but this is an American “custom” I could go without.
Minimum wage is going up in states all across the country. As an employer, you have FLSA regulations to adhere to.
Start thinking about ways to meet them without cutting into your profit. Our business is very high-overhead. No longer can salon owners continue to push these CODB expenses onto their staff. The person that needs to be paying the service fees, the product charges, and covering your staff payroll are the clients that are enjoying those things–not the employee herself.
Never forget that this is a business. Do your math (like every other business out there) and make sure you’re doing better than breaking even.