Tip pooling, splitting, and sharing: the complete guide for restaurant owners

A good team delivers good service as a unit. That’s why many restaurant owners implement a tip pooling system between servers and supporting staff, such as line cooks, hosts, and bussers. Although servers are the main point of contact for the restaurant patron, it takes a team to complete the experience. But complying with the different tip pooling laws, choosing between various tip-sharing options, and knowing how to calculate tips for employees to ensure fairness can be difficult—that’s why we’re here to help. We’ve laid out everything you need to know to make tip splitting as seamless and simple as possible, from legal information to how to implement tip distribution with ease. We even included a tip pool calculator so you can tip split like a champ.

What is a tip?

The Internal Revenue Service (IRS) defines a tip as “discretionary (optional or extra) payments determined by a customer that employees receive from customers.” Hospitality roles are where tips are most prominent; tips could include:

• Cash tips directly from customers.
• Credit card, debit card, gift card, and any other electronic payment method or charged tip.
• Any non-cash tip value, such as tickets.
• Tips received from other employees paid out through tip pooling, tip splitting, or other formal or informal tip-sharing arrangements.

In general, the tip amount is the cost of the service multiplied by 0.XX, with XX being the percentage you want to leave as a tip. Your total cost (service and tip) is your cost multiplied by 1.XX, with XX again being the percentage you want to leave the staff. For example, the cost of service is $50, and the tip percentage is 20%. Convert the percentage into a decimal (0.20) and multiply that number by the cost of service. So, for $50, the tip amount is 50 x 0.20 = 10. The tip is $10. To calculate the total cost, add 1 to the decimal percentage (1.20) and multiply that by the total cost of service ($50). So, 50 x 1.20 = 60. The total cost, including tip, is $60.

What is tip pooling, and how does it work?

So how does tip pooling work? Tip pooling means all tips collected are combined into a single pool and redistributed fairly among all employees at the end of a shift. A tip pooling policy ensures that every restaurant employee—including back-of-house staff such as cooks and dishwashers—benefit from customer tips. Pooled tips are commonly distributed to staff based on hours worked, job role, or a set percentage. For example, it would be unfair if employee A worked a 10-hour shift and employee B worked a 5-hour shift, and they received the same amount of tips from the pool. The advantage of tip pooling is that it helps build trust and cohesion among team members and encourages teamwork because everyone benefits from good service and higher tips. It also helps address pay disparities between front and back-of-house staff. Learning how to calculate tip pool lets you empower your team to connect and provide better service.

Tip pooling example:

Company policy states that all tips collected by servers are combined into a single pool and distributed among all staff based on percentages:

• 50% to servers
• 30% to bussers
• 20% to bartenders

Three servers earn a combined $500 in tips. Two bussers and two bartenders supported them.

• $250 (500 x 0.50) is distributed to the servers, meaning that they receive $83.33 each ($250 / 3)
• $150 (500 x 0.30) is distributed to the bussers, who receive $75 each ($150 / 2)
• $100 (500 x 0.20) is distributed to the bartenders, who receive $50 each ($100 / 2)

What is tip sharing, and how does it work?

Tip sharing happens when an employee’s tips are shared with other employees who helped and assisted in service. However, not all tips are pooled together. Employees keep a portion of their own tips and share a percentage or amount with other staff members. Tip sharing is typically done based on an agreed-upon arrangement or understanding among employees. It allows for more flexibility when distributing tips, as employees have the autonomy to decide who they share their tips with and the amount they choose to share. And sharing tips with kitchen staff can enhance team cohesion.

Tip sharing example

Server A makes $100 in tips. They share 10% of their tip with the bartender, who receives $10 (100 x 0.10), and 20% with Server B, the other server on shift. Server B makes $175 in tips. They share 15% of their tip with the bartender, who receives $15 (100 x 0.15)

What is tip splitting, and how does it work?

Tip splitting occurs when tips are divided among employees who contributed to the service, such as front-of-house staff, including servers, bartenders, and bussers. The split often reflects the role or level of involvement in the service. For example, a server might receive a larger share compared to a busser. Wondering whether an owner gets to receive part of the tip split? That's a no, since they generally earn more than other staff. However, restaurant owners can add a service charge, though service charges are different than tips. Tips are typically split at the end of a shift, service, or day and help reward specific individual contributions and roles more directly.

Tip splitting example

The company tip-splitting policy is servers split 20% of their tips with bussers and 10% with bartenders. Server A makes $100 in tips. They split 20% ($20) with the busser and 10% ($10) with the bartender. Server A gets to keep $70 of their tips for themself.

Tip pooling vs. tip sharing: what’s the difference? 

Though they sound similar, tip pooling and tip sharing are not interchangeable. Tip sharing is entirely voluntary and doesn’t carry the same mandatory guidelines as tip pooling. Whichever approach you implement, make sure your team has an understanding of their obligations.

Notable tip pooling laws in 2024

Tip pooling is subject to laws at the federal and state levels. First and foremost, you must pay tipped employees at least $2.13 an hour (the minimum cash wage) and the federal minimum wage.According to the Fair Labor Standards Act (FLSA), employees who receive tips are classified as tipped employees if they make more than $30 in tips per month.In these cases, you can pay tipped employees less than the standard minimum wage as long as the total amount of tips, combined with the hourly pay, reaches or exceeds the federal minimum wage of $7.25. You're required to make up the difference through a tax credit if the combined wages are below the minimum wage.

• You can’t claim a tip credit above $5.12.
• You can't claim a tip credit that exceeds the amount of tips actually received by the tipped employee.
• Employees must know that you’re applying for a tip credit.

FLSA tipping laws.

The FLSA is also very clear on tipping laws for employers and employees. Here’s what you need to know:

1. Employers, supervisors, and managers are not allowed to keep any portion of employee tips, even if a tip pool is in place.
2. If you pay tipped employees the full minimum wage without applying a tip credit, non-tipped employees like cooks and dishwashers can participate in the tip pool.
3. Employers that collect tips to operate a mandatory tip pool must distribute the tips entirely within the same pay period in which they were collected.
4. Employers who do not take a tip credit but still collect employees’ tips for a mandatory tip pool must maintain payroll or other records that include information about each employee who receives tips, as well as the amount of tips reported by each employee on a weekly or monthly basis.
5. Employers can use tip credits only if at least 80% of an employee’s work involves activities that generate tips—such as serving food, providing table service, making and serving drinks—and no more than 20% involves support work—like setting tables or cleaning the bar.

How are pooled tips taxed?

According to the IRS: “All cash and non-cash tips received by an employee are income and are subject to Federal income taxes. All cash tips received by an employee in any calendar month are subject to social security and Medicare taxes and must be reported to the employer.” However, if an employee's total tip amount in a calendar month is less than $20, you don't need to report these tips. Even better, the government won't tax them.

How to split tips by hours, percentages, and a points-based system:

When it comes to learning how to split tips between employees, there are several different options, including:

• Split tips based on hours worked 
• Points system
• Percentage tip-out

Here’s a breakdown of each method and how it works:

How to split tips by hours:

To split servers’ tips based on hours worked, add up the total amount of tips and then divide that figure by the total hours worked. Then, multiply that figure by the hours an individual server worked. Hours worked tip splitting example:Your employees earned a total of $1,000 in tips over the course of a day. Server A worked an 8-hour shift, server B worked a 5-hour shift, and server C worked a 7-hour shift, for a total of 20 hours combined work. $1,000 (total tips) divided by 20 (hours worked) equals 50, so multiply that figure by each employee’s hours:

• Server A: 50 x 8 = $400
• Server B: 50 x 5 = $250
• Server C: 50 x 7 = $350

To check your calculations, make sure the individual employees’ take-home tips are equal to the total amount of tips earned in the shift. Using a time tracking software like Homebase makes it easy to monitor hours of work, simplifying your tip calculations.

How to use a tip pool point system:

A tip pool point system is an effective way to pool 20-100% of the servers’ tips and fairly disperse them among all employees, including bussers, bartenders, hostesses, runners, and other staff members who help keep your restaurant service running smoothly. This method also helps keep staff happy by ensuring that no one has a particularly terrible shift. Using a points system, calculate dispersion on a percentage basis. Different types of employees receive a certain number of points. Then, you divide the percentage of the tip pool by those points.

Point system tip splitting example:

Let’s say your servers are given 10 points each, and your bartenders and bussers are given 5 points each. If $1,500 in tips was earned in a shift, it would look like this:

• Servers (3): 30 points
• Bussers (1): 5 points
• Bartenders (2): 10 points
• Total points: 45

Divide the total number of tips ($1,500) by the total number of points (45), and you’ll get the worth of each point, which in this case is $33.30. Multiply each staff member’s points by $33.30This results in the servers each receiving $330 and the busser and bartenders each receiving $166.50.

How to split tips by percentages:

Another form of tip splitting involves servers using the honor system, which is a restaurant tip-out structure that includes tipping out the support staff based on a percentage of the tips they earned. Assign each of the supporting service roles a percentage of the total tips. Usually, the percentage split would be 10% to the bartender and another 25-30% shared among the remaining employees.

Percentage tip splitting example:

Here’s an example based on a restaurant: The total amount in the tipping pool is $2,500. This means that the following job roles would receive: 

• Three servers at 20%, which equals $1,500 ($500 each)
• Two bartenders 10%, which equals $500 ($250 each)
• Line cook 10%, which equals $250
• Busser 6%, which equals $150
• Host 4%, which equals $100

Tip distribution calculator. 

Regardless of the method, it’s important to make sure you stay on top of the process. We’ve put together a free tip-splitting spreadsheet to make it easier to keep track of who gets what.

Homebase helps you tip your team with ease.

Tip pooling ensures your entire team is compensated fairly. Between tip pooling, tip splitting, and tip sharing, you can choose between many options to suit your small business and your team. But no matter the method you choose, you’re left with a handful of math to do each pay period. Luckily, nowadays you can leave the paperwork behind and handle your tip payments with technology. Homebase is an all-in-one app that simplifies your tip tracking by syncing your processes with payroll. When you time track and schedule your employees directly in our app, it’s easy to calculate how many hours each server, busser, or line cook worked. From there, your timesheets connect directly with payroll so that paying out tips is a breeze, and your team can share tips with ease.

{{banner-cta}}