A party of 12 just finished a three-hour dinner, ran your server ragged with split checks and special requests, and left an 8% tip. It happens more often than it should—and it’s exactly why automatic gratuity exists.
Automatic gratuity is a predetermined service charge (usually 15% to 22%) that restaurants add to the bill for large parties, protecting servers from walking away short-changed after high-effort tables. This guide covers the legal requirements, how to set up a policy at your restaurant, and the tax implications you’ll want to get right.
What is automatic gratuity?
Restaurants can generally add automatic gratuity to a guest’s bill, subject to disclosure requirements and jurisdiction-specific regulations. The policy has to be disclosed clearly—and in many states, before the guest orders. Automatic gratuity (also called “auto grat”) is a predetermined service charge added to the check, typically for large parties of six or more guests.
Unlike a voluntary tip where the guest decides the amount, auto grat is set by the restaurant and appears as a line item on the bill. The IRS doesn’t classify automatic gratuity as a “tip” at all, though. It’s considered a service charge, which changes how you handle taxes and payroll.
How auto gratuity differs from a voluntary tip
The difference comes down to control.
- Voluntary tip: The guest decides how much to leave based on their experience.
- Automatic gratuity: The restaurant sets a fixed percentage that’s added to the bill.
- IRS classification: Auto grat is legally a service charge, which affects how it’s taxed and distributed.
This classification isn’t just paperwork. It changes how you report income, withhold taxes, and distribute funds to your team.
Why restaurants charge gratuity for large parties
Large parties take more time, more attention, and more coordination than a four-top. Your server is essentially dedicated to that table for the entire meal. They’re refilling 12 waters instead of four, coordinating split checks, and managing a longer ticket time.
Large parties also tend to tip less per person than smaller tables. Auto grat protects your servers from putting in extra effort and walking away with less than they’d make on two or three regular tables during the same window.
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Is automatic gratuity legal?
Automatic gratuity is generally permitted in the United States, subject to state and local disclosure, labeling, and distribution requirements. While many jurisdictions require disclosure on menus or wherever prices are displayed before guests order, there is no universal federal mandate. Check your local regulations to understand the specific requirements in your area.
Can restaurants add mandatory gratuity?
Yes, as long as you disclose it clearly and meet your jurisdiction’s specific requirements. Post it on your menu, include it in reservation confirmations, and have your host mention it when seating large parties. Clear, conspicuous, and timely disclosure that meets local standards makes the charge enforceable.
Think of it like a corkage fee or a private dining minimum. It’s a condition of service that guests agree to when they choose to dine with you.
Can customers refuse to pay automatic gratuity?
If you disclosed the policy clearly and met your jurisdiction’s requirements, guests generally can’t refuse to pay. The charge becomes part of the bill, just like the food and drinks.
If the policy wasn’t disclosed properly? That’s a different story. Guests may have grounds to dispute the charge, and you’ll likely end up removing it to avoid a scene. Clear communication prevents awkward conversations at the end of the meal.
Auto gratuity laws and IRS requirements
Here’s the part that trips up a lot of operators: automatic gratuity isn’t treated like tips for tax purposes. The IRS classifies it as a service charge, which means different rules apply.
Tax and labor laws vary by state. This is general information, so work with a payroll provider or accountant familiar with restaurant-specific requirements for your situation.
The difference between a service charge and a tip
| Service charge (auto gratuity) | Voluntary tip | |
|---|---|---|
| Who decides amount | Restaurant | Guest |
| IRS classification | Non-tip wage | Tip income |
| Employer control | Restaurant controls distribution | Restrictions on who receives it |
| Tax reporting | Reported as regular wages | Reported as tip income |
The practical impact: you withhold taxes from the portion of auto gratuity distributed to employees before it reaches them, just like you would with regular wages.
How to report auto gratuity to the IRS
Because auto gratuity is a service charge, you treat the portion distributed to employees as regular wages for tax purposes. That means withholding Social Security, Medicare, and income taxes before the money reaches your employees.
Voluntary tips work differently. Employees report their own tip income, and you handle the withholding separately. If you’re running auto grat through your payroll system, make sure it’s categorized correctly.
When to use automatic gratuity at your restaurant
Auto grat isn’t right for every restaurant. Whether it makes sense depends on your service style, typical party sizes, and what your guests expect.
Large party dining
This is the most common use case. Restaurants commonly set the threshold at six or eight guests, though you can adjust based on your table sizes and service capacity.
A party of 10 takes up a server’s entire section for two hours. Auto grat ensures they’re compensated fairly for that time, regardless of how the guests feel about tipping.
Private events and catering
For private dining rooms, off-site catering, and restaurant buyouts, automatic gratuity is commonly included as standard practice. Guests booking private events generally expect an included gratuity as part of the package.
Build it into your event contracts and quote it as part of the total price. No surprises, no awkward conversations at the end of the night.
Banquets and prix fixe menus
When guests book set menus or banquet packages, including the gratuity simplifies everything. You’re already quoting a per-person price, so adding the service charge makes the total clear upfront.
How to set up automatic gratuity at your restaurant
Getting auto grat running takes a few steps. Here’s how to do it right.
1. Choose your gratuity percentage
Restaurants commonly set auto grat between 15% and 22%, with 18% and 20% being frequent choices. Consider what competitors in your market charge and what feels fair to both guests and staff.
Too low, and your servers might actually make less than they would on voluntary tips. Too high, and guests may push back.
2. Set your minimum party size
Six or eight guests are common thresholds. Think about your table sizes and how many covers a single server can reasonably handle.
If your largest table seats eight, setting the threshold at six makes sense. If you regularly seat parties of 10 to 12 at communal tables, you might set it higher.
3. Update your POS system and receipts
Work with your POS provider to configure automatic gratuity. The system can add the charge automatically when the party size hits your threshold.
Make sure the charge appears as a clear, labeled line item on the receipt. Something like “18% Gratuity (Party of 8)” removes any confusion.
4. Train your team to communicate the policy
Your servers are the front line here. Train them to mention the auto grat policy when greeting large parties and again when presenting the check.
Give them a simple script: “Just so you know, we add an 18% gratuity for parties of eight or more.” It’s not a sales pitch. It’s transparency. Most guests appreciate knowing upfront rather than being surprised on the bill.
How to write an automatic gratuity policy
A clear, written policy protects your restaurant and sets proper expectations. Post it everywhere guests might look.
Key elements of an auto gratuity policy
Your policy doesn’t need to be complicated, but it does need to cover the basics:
- Party size threshold: “Parties of 6 or more guests”
- Gratuity percentage: “An 18% gratuity”
- Where it applies: Dine-in, private events, catering, or all of the above
- How it’s distributed: Does it go to the server, get pooled, or split with support staff?
- Disclosure locations: Menu, website, reservation confirmations
Sample automatic gratuity disclosure language
Keep it simple and direct, like:
“A gratuity of 18% will be added to all parties of 6 or more guests. This gratuity is distributed to your service team.”
Post this on your menu (near the bottom or with your policies), on your website’s reservations page, and in any confirmation emails for large party bookings.
Pros and cons of automatic gratuity for restaurants
Like any policy, auto grat has tradeoffs. Here’s a balanced look.
Pros of auto gratuity
- Protects server income: Fair compensation for high-effort tables
- Reduces payment disputes: Clear expectations mean fewer awkward conversations
- Simplifies large party billing: One calculation instead of waiting to see what guests leave
- Supports tip pooling: Easier to distribute when the total is predetermined
Cons of auto gratuity
- May limit tips: Some guests who would’ve tipped 25% feel the amount is “handled”
- Guest perception: Some diners view it negatively, especially if service was poor
- Tax complexity: Service charge classification requires different payroll handling
- Requires clear communication: Without proper disclosure, you risk disputes
How automatic gratuity affects tip pooling and distribution
Because auto gratuity is legally a service charge, not a tip, you have more flexibility in how you distribute it. You can allocate it to servers, bussers, food runners, and even back-of-house staff if your state laws allow.
Voluntary tips have stricter federal rules about who can receive them. If you run a tip pool, auto grat can actually simplify things by giving you a predictable amount to work with.
Alternatives to automatic gratuity
Auto grat isn’t the only way to ensure fair staff compensation. Here are other approaches.
Tip pooling
Distribute all voluntary tips among front-of-house staff (and back-of-house where legally permitted). Tip pooling evens out income across shifts and reduces the financial risk of one bad-tipping large party.
Service-included pricing
Build labor costs into your menu prices and pay staff higher, more stable wages. Service-included pricing eliminates tipping entirely but requires careful pricing and clear guest communication.
Flat service fees
Add a consistent service fee to all checks, not just large parties. Flat service fees create predictable revenue for staff but have the same tax implications as auto gratuity and require clear disclosure.
Simplify auto gratuity and tip management
Tracking auto gratuity, distributing tips fairly, and staying compliant takes time. Doing it manually means spreadsheets, calculators, and a lot of back-and-forth.
Tip management tools like 7shifts can help automate tip pooling calculations, track gratuity distribution, and connect directly to your payroll.
Payroll Implementation Checklist
Use this handy checklist so you don’t miss a thing.
FAQs about automatic gratuity at restaurants
Should customers tip on top of automatic gratuity?
Automatic gratuity covers the standard tip, so additional tipping is optional. However, guests who received exceptional service sometimes choose to leave extra.
Is automatic gratuity calculated before or after tax?
Typically, auto gratuity is calculated on the pre-tax subtotal, as this is the common default setting in most POS systems. However, systems can be configured differently, so check your POS settings to confirm how your system handles the calculation.
What is the standard automatic gratuity percentage at restaurants?
Restaurants commonly set their rate between 15% and 22%, with 18% and 20% being frequent choices for large party dining.
Do restaurants have to disclose automatic gratuity on the menu?
Disclosure requirements vary by jurisdiction. Many states and localities require disclosure on menus, signage, your website, and in reservation confirmations. While there is no universal federal mandate, clear disclosure is essential for enforceability and compliance with local laws.
Can restaurants apply automatic gratuity to delivery or takeout orders?
Yes, though it’s less common for standard takeout. Some restaurants add auto grat to large catering or delivery orders. If you do this, disclose the policy clearly during the ordering process.
FAQs about automatic gratuity at restaurants
Should customers tip on top of automatic gratuity?
Automatic gratuity covers the standard tip, so additional tipping is optional. However, guests who received exceptional service sometimes choose to leave extra.
Is automatic gratuity calculated before or after tax?
Typically, auto gratuity is calculated on the pre-tax subtotal, as this is the common default setting in most POS systems. However, systems can be configured differently, so check your POS settings to confirm how your system handles the calculation.
What is the standard automatic gratuity percentage at restaurants?
Restaurants commonly set their rate between 15% and 22%, with 18% and 20% being frequent choices for large party dining.
Do restaurants have to disclose automatic gratuity on the menu?
Disclosure requirements vary by jurisdiction. Many states and localities require disclosure on menus, signage, your website, and in reservation confirmations. While there is no universal federal mandate, clear disclosure is essential for enforceability and compliance with local laws.
Can restaurants apply automatic gratuity to delivery or takeout orders?
Yes, though it’s less common for standard takeout. Some restaurants add auto grat to large catering or delivery orders. If you do this, disclose the policy clearly during the ordering process.
Rebecca Hebert, Sales Development Representative
Rebecca Hebert
Sales Development Representative
Rebecca Hebert is a former restaurant industry professional with nearly 20 years of hands-on experience leading teams in fast-paced hospitality environments. Rebecca brings that firsthand knowledge to the tech side of the industry, helping restaurants streamline their operations with purpose-built workforce management solutions. As an active contributor to expansion efforts, she’s passionate about empowering restaurateurs with tools that genuinely support their day-to-day operations.
