The short answer
Tips belong to your staff. Card tips come into your bank account, so record them as money owed to staff (a liability), not as sales. When they're paid out, clear that liability, and report the tips through payroll the way your state, province or country requires.
Why tips aren't sales
When a guest adds a tip on a card, the full amount lands in your deposit. It's tempting to book the deposit as sales, but the tip was never yours. Counting it as revenue makes sales look higher than they are, makes your food and labour percentages look better than they are, and leaves a hole when the tips are paid out.
How card tips flow through the books
- At the sale: the meal is recorded as sales, and the tip as a tips payable liability.
- At the deposit: the card settlement includes both, and is matched to them.
- At pay-out: tips paid in cash at the end of a shift, or through the next payroll, reduce the liability to zero.
- At reporting: tips are reported through payroll, so the right taxes and slips follow.
If the tips payable balance keeps growing, tips are being collected and not paid out, or paid out and not recorded. Either one needs fixing.
Tip pools and tip-outs
Pooling and tip-out rules decide who gets what share. Write the policy down, apply it the same way every pay period, and keep the records. Many jurisdictions restrict who can take part in a tip pool (managers and owners are commonly excluded), so check the rules where each location operates.
Where the rules differ
United States
Employees generally report their tips to the employer, and the employer withholds income tax and payroll taxes on reported tips. Federal and state rules on tip credits, tip pools and minimum wage for tipped staff vary, and there is a federal tax credit some food and beverage employers can claim on part of the payroll taxes paid on tips. Each of these is worth getting right in setup.
Canada
The tax treatment depends on who controls the tips. When the employer controls how tips are collected and shared, they are generally treated as part of employment income for payroll deductions. When a guest gives a tip directly to a server, the treatment is different. Provinces also have their own rules on tip sharing.
Service charges are different
An automatic gratuity or service charge added to the bill may not be treated as a tip at all, in either country. It can count as revenue for the business and as wages when paid to staff. Decide how you'll handle it before you add one to the menu.
How Savoury handles it
Payroll is set up the way restaurants actually pay people, with tips handled correctly from the start, and US and Canadian rules kept separate.
Restaurant payroll and tipsThis is general information, not tax advice for your business. Rules change and differ by state and province.
