It’s commonplace for customers to tip hospitality workers, and a way of splitting those tips – tip pooling, tip sharing, or tipping out – often go together.
Tip sharing is a way for everyone who adds to the customer’s experience to reap the reward for great service, and it’s become more common for the employer to decide how tips are divided.
Understanding the different methods for tip sharing and setting up a fair, transparent system will help employers avoid any pitfalls. Let’s start with the basics:
What’s a tip?
A tip, or gratuity, is a sum of money a customer pays in addition to the cost for services rendered. A tip isn’t required (like charging a “service fee”) and counts as taxable income for the employee. It’s up to employees to report their tips, but employers also have their own share of the IRS paperwork.
What’s tip pooling?
In tip pooling, employees put all their tips together and divide them (often equally) between themselves.
It’s important to understand that tip pooling isn’t the same as tip sharing. Tip sharing or tipping out is when tipped employees pool their tips together and share those tips with non-tipped employees.
This is becoming more popular with employee concerns about pay equality, wage transparency, and the opportunity for everyone to earn a living wage. Plus, tip sharing can help build a teamwork atmosphere.
Since employers, managers, and supervisors can’t legally participate in a tip pool, employees often turn to management as an impartial third-party to set up a fair system for tip sharing.
As a business owner, if you take on the duty to establish a tip share system, it’s important to be aware of the federal and state regulations for tip pools.
It doesn’t help that tipping regulations can change with each federal administration. The 80/20 rule has flip-flopped under Obama, Trump, and now Biden. This is just one reason why having an experienced payroll provider can help you avoid headaches and financial risks.
Methods for Tip Sharing
It’s important to be transparent and make sure all your staff understands how the tip pooling system works. There are a few different ways to calculate who gets how much when sharing tips:
Even split – Employees pool all their tips and evenly distribute them. It’s easiest to understand and is common with fast-casual restaurants and QSR.
Hours worked – Pool all the tips and divide by the total number of servers and the hours each worked: Pool = (Tips / Totals Hours of All Servers) x Hours per Server.
Percentage tip-out – Tipped employees keep a majority percentage of their tips based on their position, and the rest is divvied up among non-tipped employees. For example, servers might keep 70% of their tips and contribute 30% to the pool. Bartenders get 50% of the pool, hosts get 20%, bussers and dishwashers each get 10%, etc.
Point system – Employees receive points based on their role and receive tips according to their total point value. Let’s pretend three servers (10 points each), two bartenders (5 pts.), and one busser (5 pts.) split $1,500 in tips.
- Servers x 3 (30 pts.)
- Busser x 1 (5 pts.)
- Bartenders x 2 (10 pts.)
The $1,500 in tips is divided by the point total (45), to get the value of each point – $33.3. Each employee’s points are multiplied by $33.3, so each server gets $330, the bartenders each get $166.50, and the busser gets $166.50 as well.
Managing Your Tip Share System
The best method will depend on how you run your business and what works best for your staff. You can even use a combination of these methods.
However, the best system may not be the easiest system. Your chosen system may require you to manage a complex, labor-intensive spreadsheet. Plus, there’s the risk of making an error, which can lead to a wage lawsuit or IRS tip audit.
You may be ready to swear off tip sharing before you even get started, but why not let Navrae manage it instead?
Navrae automates your payroll to reduce human error, and save time and money. By pulling employee data and credit card tips directly from your existing POS system, we can calculate each employee’s tip share by percentage, hours worked, or position; whatever method you choose!
Employees also receive an email report showing the tip breakdown every night. This reduces tip disputes and employees asking you about their tips. We also provide all the information you need to file Form 8027 and 8846 for your employer tip income reporting and tip credits.
Navrae partners with In-Prepaid to offer a pay card option making nightly tip outs even easier and more secure. There’s no need to keep thousands of dollars of cash on-hand to payout each employee’s credit card tips. And your employees will feel safer not walking out with hundreds of dollars in cash in their pocket.
If you’re interested in how Navrae’s services can help you manage your payroll and bookkeeping, contact us here. We look forward to hearing from you.