If you run a service business that handles tips, you know just how complicated it can be. Customers can leave tips via a variety of means, and they have to be reported and dealt with correctly in terms of payroll so your business and employees stay compliant. 

Luckily, knowing a few key terms can go a long way when it comes to understanding tips.

What are cash tips?

Cash tips are just what they sound like, tips customers give to employees in cash. Often restaurants, bars, salons, and other service establishments deal with cash tips. Cash tips are considered to be income, and therefore they are subject to payroll taxes, just like all regular wages. 

Cash tips are typically given to employees as they are earned, which is important to note when running payroll. If your business cashes out credit card tips at the end of the night, payroll considers them to be cash tips. 

What are charged tips? 

Charged tips are tips that you charge by card, meaning tips left via credit, debit, or gift cards. Just like cash tips, charged tips are wages and as such, are subject to all normal payroll taxes. Charged tips are often paid out via payroll, not at the end of the night or shift. This is why many people refer to them as “paycheck tips.” 

Reporting tips and running payroll

It’s important to report tips and handle them correctly in your payroll run in order to stay compliant. This is particularly true for businesses that handle cash tips, which can be a little more complicated.

Reporting cash tips and running payroll

Any employee who receives over $20 per month in cash tips from an employer must report these tips. It is the employee’s responsibility to keep a daily record of the cash tips they receive and report it to their employer. 

As an employer, once you have the cash tip info from your employees for the pay period, you can add it into payroll. When you add cash tips into payroll, make sure that you note they have already been paid out, so you don’t double-pay these amounts.

The cash tips will increase the employee’s gross wages, which will impact payroll taxes accordingly. The employee can then see a record of their total wages, tips, and taxes on their pay stub. 

Reporting charged tips and running payroll

If you cash out charged tips and hand them to employees, then these will be treated like cash tips in the section above. If you pay out charged tips via payroll, then you must make sure to keep an accurate record of an employee’s charged tips for each pay period. 

Once you know the tip amount, add it into your payroll run and note that you have not paid it out yet, so it must be paid out in this payroll. Then run the payroll regularly with the charged tips as wages. The employee can see a record of their total wages, tips, and taxes on their pay stub.

If you are looking for help, check out Homebase Payroll. Homebase offers an online payroll service that syncs automatically with your time tracking and scheduling. You’ll never have to enter hours manually and payroll is a breeze.