This past year has been one for the ages, even more so when considering the pandemic’s impact on the restaurant industry. Federal, state and local relief has been widespread, ranging from state and local grants to federal programs such as two rounds of the Paycheck Protection Program, Employee Retention Credits, and SBA loan relief.

As we transition into 2021, there is congressional support for the Raise the Wage Act of 2021; however, this legislation has not been passed by Congress. This Act would increase the federal minimum wage from $7.25 per hour to $15 per hour and eliminate the tip credit for servers. It goes without saying this would be a significant change for the restaurant industry. The impact of this potential change gives rise to a host of issues and considerations which we detail below:

  • Raising the minimum wage and eliminating tips/tip credit will significantly increase labor costs. According to the National Restaurant Association, this would lead to a 600% increase in labor, severely impact restaurateurs’ cost structure and bottom line. Alternatively, restaurants would likely also be passing this cost on to consumers which raises menu prices.
  • The elimination of the FICA Tip Credit is tied to raising the federal minimum wage as part of the Raise the Wage Act of 2021. The FICA Tip Credit has been a meaningful tax credit that has saved restaurants significant tax dollars.
  • Most servers on average would earn more than the new minimum wage with tips, so they would likely take a pay cut. According to the National Restaurant Association, tipped servers generally earn between $19 and $25 per hour.
  • The other consideration is that a national minimum wage of $15 does not make sense to use for markets across the board with rural, regional, or national geographies. The $15 minimum wage might make sense in larger markets but not rural areas. This transition would be easier for the large national restaurant groups to stomach but could literally put small operators out of business without increasing menu prices to pass on the increased costs.
  • The increase in wages would push restaurants to run leaner staff, which would reduce hours and eliminate jobs potentially. It will also force more businesses to automate processes like turning to more staff/kitchen automation, kiosk ordering, etc.

As restaurateurs continue to navigate through the current challenges, they should have this potential change and implications on their radar. To discuss this information in more detail, contact your GBQ advisor today.

 

Article written by:
Kaz Unalan, CPA
Director, Tax & Business Advisory Services

 

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Tags: Operations