If you own or manage a restaurant, you've probably dealt with tip pooling. It's a common way to share tips among employees and can work well when everyone understands the process.
As you might imagine, there are plenty of rules around tip pooling. Employers who operate outside of those rules may find themselves dealing with payroll reporting problems, penalties, claims for back wages, or even a tax audit.
Don't worry, this isn't meant to scare you. Our goal is to help you understand a few basics so you can avoid common mistakes.
What is Tip Pooling?
Tip pooling combines all or part of the tips collected into one central pool. The tips are then divided among eligible employees using a set formula, such as hours worked or points.
Tip sharing (or tipping out) allows employees to keep their primary tips while giving a set portion to other eligible employees, such as bussers or hosts.
Under federal law, managers and supervisors cannot participate in either arrangement.
Who Can Be Included?
Whether you claim the federal tip tax credit matters (IRS Form 8846 Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips). If you do, generally only those employees who regularly receive tips should participate. In some cases, if you pay everyone at least the full minimum wage and do not claim a tip tax credit, some back-of-house employees may also qualify. Managers and supervisors generally should not receive tips from a tip pool.
Have You Explained Your Tip Pool to Your Employees?
A written policy can be a good way to communicate which employees participate, how tips are divided, and when employees receive their share. Of course, there are laws that dictate how payments can be made to employees. So, it’s a good idea to consult with an attorney as you develop this policy.
What About Side Work?
If tipped employees spend significant time doing work like rolling silverware, cleaning, or opening and closing duties, it may affect how they should be paid.
Tips and Service Charges are Different
A tip is left by the customer. A service charge is added by the business. They are handled differently for payroll and tax purposes.
Accurate Payroll Starts with Accurate Information
It’s important that your daily operations require and enable proper reporting of tips by employees. Correct tip reporting from employees helps ensure accurate payroll reporting and year-end W-2 forms.
What Could Happen If Your Tip Pool Isn't Set Up Correctly?
Many employers simply don't realize there is a problem until confronted with an audit or employee complaint. The result could include back wages, taxes, penalties, and legal costs.
A Few Simple Best Practices
- Create a written policy (consider consulting an attorney)
- Train employees
- Exclude managers
- Understand your tip credit
- Keep good records
- Review your policy regularly
We're Here to Help
While we don’t provide legal advice, we can help you understand the payroll reporting requirements related to tipped employees so you can operate your payroll without unnecessary hassles.
Blog Disclaimer: Nothing in this post constitutes legal, tax, or financial advice and is intended for informational and educational purposes only. This informational and educational material is not intended, and must not be taken, as legal, tax, or financial advice on any particular set of facts or circumstances or as recommendations that are suitable for any specific person. You need to contact a lawyer, accountant, or financial adviser licensed in your jurisdiction for advice on your specific questions, issues, and concerns. View our full Terms of Use here.
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