People ask me all the time, “how do I account for tips?” To get a handle on restaurant tipping, start by recording all tips on everyone’s paychecks. Employees used to ask me not to put tips on their paychecks because they didn’t want it to get taxed, but you should. I’ve seen too many restaurants get audited or penalized for not reporting tips. The IRS leaves it up to each employee to declare cash tips that they’ve earned to their employer. However, the restaurant typically receives the bulk of tips through credit and debit card sales and then reallocates those to their employees.
Paying tips on paychecks adds a cost to the restaurant. They have to pay employer taxes on those tips, but it’s still income going to employees.
From an accounting standpoint, it’s easier than counting cash at the restaurant each night to pay out tips. Instead, save those labor costs by simply paying extra payroll taxes.
ALLOCATING TIPS
Restaurant operators have two primary options when allocating tips.
- Percentage of Hours Worked: In a two-week pay period, let’s say the restaurant makes $1,000 in tips. If you worked 10% of the hours, you get 10% of the tips.
- Point System: Servers, bartenders, bussers, and expediters could each get a certain amount of the tips. You could include people in the back of the house as well.
I believe everybody should pool tips because everybody had a hand in generating that tip. The server should probably keep the biggest portion. Before implementing any kind of tip system though, make sure your state allows tip pools. In some states, tips are reserved exclusively for front of the house employees.
CALCULATING TIPS
Finer dining establishments have intricate systems for reporting tips. At a certain point you need to get away from doing Excel calculations. As great as an Excel sheet can be, it will break at times. It shouldn’t be anyone’s responsibility to try to fix every crazy tip calculation. You should use a system to help manage it.
- TipHaus is a good solution.
- 7shifts is a scheduling platform that also has a built-in tip function.
- Toast payroll, although not one of our preferred restaurant payroll companies from a customer support standpoint, has a tip reporting function as well.
On any given day, a restaurant receives money from its customers. Tips should then be paid to employees, presumably with payroll. If every night I collect $100 and have weekly payroll, then I should pay employees $700 at the end of the week. That functionality should live on your balance sheet. You shouldn’t see the income from tips and paying tips on your P&L.
ADDITIONAL RESTAURANT FEES
- Some restaurants charge diners service fees that may or may not go to employees.
- Restaurants may provide an option to pay kitchen appreciation fees that go to kitchen staff.
- Health insurance reimbursement fees are designed to cover employee health insurance.
Even though you pay those fees to employees, from a tax standpoint, the IRS considers them income. Those service fees aren’t technically tips. Technically speaking, a service fee is actually income for a restaurant, which you’re receiving and then paying to employees.
If you are charging mandatory service fees or health insurance fees and the guest doesn’t have the option to skip them, you need to be charging sales tax on them . A lot of restaurant operators forget to do that. Set up your restaurant tipping system correctly. Otherwise, the IRS will make you pay those sales taxes if they audit you.
