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Thread: Question on Tips

  1. #1
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    Default Question on Tips

    This one is for the accountants in the room...

    I recently opened a small takeaway restaurant. We have a tip jar for cash tips and we also allow customers to leave a tip on our POS system if paying by credit card. The tip jar usually only collects a few dollars a day but the credit card tips can equal up to 10% or more of gross sales. The credit card tips are deposited daily in my bank as part of my total credit card sales from my merchant services provider. Accounting, allocating and distributing those CC tips have been a real source of irritation for me since day one. Out of desperation I recently enacted a system where the employees themselves create a daily tip allocation report. Each week I check the report to ensure it matches the total tips received then I withdraw that amount in cash and distribute it to my employees according to the report they provided me. My employees are responsible for the allocations in the report, so if there are any problems (other than if the tips they allocate are larger than the tips actually collected) I simply go back to my supervisors and tell them to figure it out. I don't consider the tips my money and I don't keep any of it. It all goes to my employees. I see myself as simply a pass-through service for the CC tips. The system seems to be working well so far.

    I was discussing my system with a business advisor and she was concerned that because I was receiving my tips in a deposit I should be accounting for the tips received as revenue for my employees, either by providing a 1099 or including it in their bi-weekly pay statements. I am not recording the tips as income so my thoughts are that I'm really nothing more than an electronic tip jar and it is up to the employees to self report the tips they receive. Who is right?

    I've never been a big fan of our tip policy because I feel it is not very dignified. We are a self-service restaurant and our employees all earn more than minimum wage. I have told my partner and my employees that if accounting for tips takes more than 15 minutes of my time per week it is not worth it to me and I will stop the practice. If I need to start tracking and reporting tips for my employees through their payroll or other methods then I will certainly stop this altogether.

    Any thoughts?
    Managing Director at The Palmier Group, LLC, and Indentured Geauxffeur at Lamia's Crepes.

  2. #2
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    tallen's Avatar

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    Default

    FWIW, here is what the IRS has to say on "Reporting Tip Income" -- https://www.irs.gov/publications/p531/index.html

  3. #3
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    Your business advisor is correct, tips are income to the employee. They need to be added to their wages, taxes calculated on the total wages, and then deducted from the from gross wages. For example, your employee's regular earnings are $500, tips received $50. Taxes would be calculated on $550.00 FICA on $550 is $42.08. Net pay would be $550.00 - 42.08 - 50.00 = $457.92.

  4. #4
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    Thanks for the replies. I also floated the question to some colleagues and everyone is in agreement. Unfortunately (for me, that is) it looks like I'll be counting-up tips each week to include in my payroll. As if doing payroll wasn't hard enough!
    Managing Director at The Palmier Group, LLC, and Indentured Geauxffeur at Lamia's Crepes.

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