YOUNGSTOWN Estimating tips prompts outcry

One longtime restaurant owner argues that the IRS' new tip-taxing method could put small eateries out of business.
By CYNTHIA VINARSKY
VINDICATOR BUSINESS WRITER
YOUNGSTOWN -- John Berndt isn't about to pick a fight with the U.S. Supreme Court, but the owner of Johnny's restaurant on East Midlothian Boulevard has concerns about a recent court ruling on how the IRS should figure restaurant tip taxes.
And he's not alone.
Restaurant owners around the country are reacting with worry to the high court's recent decision giving the IRS the right to estimate a restaurant's tips based on its credit card receipts.
Restaurant owners could then be billed for Social Security and Medicare payroll taxes based on those estimates.
Compliance
Berndt said he's been careful to comply with federal law in reporting his employees' tips, and he has his cash register programmed to tabulate tips automatically to avoid error.
But any estimate based only on credit receipts would be inaccurate, he said, because tips vary so widely from day to night, from server to server and from cash payer to credit payer.
"I have servers who make $800 a week; I have some who make $200 a week. My daytime servers might make $20 to $40 a day, and my night turn servers might make as much as $300 a night," he explained.
Besides, Berndt argued that the IRS would be forced to spend "massive amounts of money" to audit the 200,000 restaurants with tipped workers across the country.
Unfair estimates
Bob Abruzzi, owner of Abruzzi's Cafe 422 in Warren and a member of the Ohio Restaurant Association board of directors, agreed with Berndt's contention that the credit estimation method is unfair.
"The problem with reconstructing based only on credit card payments is that it's not an exact science. It's very nebulous," he said. "It's well known that people who pay by credit card are more generous with tipping."
He said restaurant owners depend upon the honesty of their servers to report 100 percent of their tips -- his waitresses are required to report their tips after every shift.
The new court ruling would force employers to "police" their servers, he said, and would add new pressure to the employer-employee relationship.
And because the credit payment estimates would almost certainly be higher that what servers are reporting, restaurants would face higher tax bills under the plan.
"This could really hit small operators," Abruzzi said.
"It could put a lot of people out of business."
Reactions
Nick Petrella, who operates the Boulevard Tavern on Southern Boulevard, said he doesn't believe the court ruling would have much effect on his small business. His servers and bartenders all pool their tips and divide them evenly every night, he said, and the restaurant won't accept credit cards.
"We're not a good barometer," he said. "The high-end restaurants will be the ones affected."
Mary Ann Logan, owner of Nicolino's Restaurant in Niles, said restaurant operators who are "on the ball" are generally monitoring their employees' tip reporting carefully already.
Her employees' training includes instructions to report 100 percent of tip income.
"Nobody wants to get audited because of what an employee is doing," she said.
Abruzzi said the National Restaurant Association objects to the ruling and has begun lobbying Congress to get the tax code changed.
vinarsky@vindy.com