The Shaky Marriage of the Affordable Care Act and Tips

For restaurateurs who have been distributing credit card-based tips on a daily basis to workers in cash, the buck stopped in 2015. Beginning January 1, 2016, employers with more than 50 full-time employees are now required to offer medical insurance to their employees due to the Affordable Care Act. This change dramatically alters the way tips will be paid out by many restaurant owners.

While one wouldn’t ordinarily make a connection between health insurance and tips, they are now joined by circumstances.

While one wouldn’t ordinarily make a connection between health insurance and tips, they are now joined by circumstances.

For years, tipped employees received their earnings at the end of their daily shift. Employers would advance credit card tips out of their cash sales or petty cash, and then retain the amount submitted by the credit card company. The paychecks of the tipped employees resulted in virtually no net pay, since cash wages were absorbed by the required taxes. In fact, more often than not, an insufficient amount of taxes were withheld from the taxable income of tipped employees.

The policy led many tipped employees to owe a great deal of money when filing their taxes each year. The industry has recognized the issue for several years, but some employers were reluctant to rock the boat and collect tips to be included in the paychecks of tipped employees.

What has been more unsettling is that when tipped employees owed a great deal of money after filing returns, they blamed their employer for not withholding enough. Thus proceeded a vicious cycle in the industry’s payment practices.

It’s likely many employees will now take advantage of their new medical coverage benefits. Employers are now able to withhold a portion of the premiums from their employees as a payroll deduction. This in turn produces a new headache; if the employees’ paychecks result in no net pay as a result of tips being paid out in cash, deductions are harder to calculate. Employers will be left with no choice other than to stop paying tips at the end of shifts and include tips in paychecks.

To a certain extent, the change eases the burden for employers who have had to advance the cash for tips due to a large percentage of sales deriving from credit cards. However, the new reality will cause all tipped employees to adjust their spending habits and wait until the end of the week to receive their earnings. In addition, and in all likelihood, there will now be sufficient compensation for all required taxes to be withheld, causing a lower weekly pay, but no balance due on April 15.

Many employers are, no doubt, unhappy about the various Affordable Care Act requirements, but the law is likely to remain in force, despite political challenges. Employers need to begin planning accordingly and remain proactive. If an employer establishes a Section 125 Cafeteria Plan, then medical premiums can be deducted on a pre-tax basis, thereby reducing total taxable income and increasing spendable or take-home income.

You might ask what is in it for the employers. The answer: not much. The Affordable Care Act was not intended to benefit businesses and, much to the dismay of restaurant and other business owners, it actually increased administrative and monetary burdens. Most restaurant owners lack the profit margins that can absorb these additional burdens.

The big mystery for 2016 is whether many employees will elect to take advantage of the new benefit being offered to them at all. We have to wait and see.