Frequently Asked Questions About How To Pay Tips To Employees
Do employers pay payroll taxes on tips?
Yes, employers pay all typical payroll taxes for tipped income. This includes Medicare, Social Security, and unemployment taxes. Employers are also required to retain all employee tip records.
How do employee tips work?
Tips can be issued to employees directly from cash or through credit card payments. Either way these tips must be reported and taxes must be paid for them by both employer and employee.
How do you separate tips between employees?
Many restaurants have their servers keep their own tips individually. Other businesses will “pool” their tips, collecting them in one big pot and then redistributing them based on hours worked. Some places will organize their dispersal based on tiered employee percentages, with servers making higher portions than food runners and bussers, for example.
What is the difference between cash tips and paycheck tips?
Cash tips are directly taken from customers. Paycheck tips are generally credit card tips that are processed by the employer and distributed by payroll for tipped employees. There are some situations where restaurants will convert credit card tips into cash for daily dispersal.