November 8, 2022 is General Election Day in the District of Columbia (D.C.) and D.C. residents have the opportunity to vote for or against Initiative Measure 82 titled “Increase Minimum Wage for Tipped Employees Measure” which would require D.C. business owners to gradually increase the pay that all workers earn to at least $16.10 per hour (plus tips) by 2027.
Tipped employees in D.C. are currently paid $5.05 per hour as of July 1, 2022. Tips that are earned help push the actual earnings that tipped employees receive to D.C.’s current minimum wage of $16.10. Initiative 82 would require tipped employees to be paid the same minimum hourly wage base as other types of workers by 2027.
By increasing the pay of tipped employees from $5.05 per hour to $16.10 per hour, restaurant owners could be on the hook for the employees’ additional hourly wages. Employers may have to fund their employees’ new wages by raising menu prices. The additional hourly wages could also potentially be funded by way of restaurant owners inserting automatic gratuities or service charges to the customers’ bills. These charges which are generally added onto restaurant bills when there is a large party, could become a standard practice if Initiative 82 passes.
If automatic gratuities or services charge become a standard practice if Initiative 82 were to pass, this could mean the potential loss of the FICA Tip Credits. The FICA Tip Credit, also known as the “Credit for Employer Social Security and Medicare Taxes,” is a federal tax credit for restaurant owners equal to the employer’s share of the Social Security and Medicare taxes paid on employees’ tips. The “FICA Tip Credit” has proven to be a highly favorable tax credit for restaurant owners as it significantly reduces tax liabilities. Initiative 82 has the potential to phase out the practice of tipping in D.C. which as result could gradually phaseout the FICA Tip Credit.
While Initiative 82 has the potential to get passed and become law, the D.C. Council could still block or modify the measure again after the election in November like they did for Initiative 77 in 2018 when the Council raised approximately $340,000 to advocate against Initiative 77. Members of the D.C. Council and members of the Restaurant Association of Metropolitan Washington have already expressed strong opposition to this new initiative.
If passed, Initiative 82 has the potential be a major game changer for how D.C. restaurant owners conduct their business. Our tax specialists are available for consultation on this issue and other business management topics for restaurants. Please contact our hospitality tax advisors or Aaron Boker at 301.231.6200 for more information.