How much of the tip does the server get?

This anecdotal tidbit lines up with actual statistical evidence — at least if you go by a report conducted by Princeton Survey Research Associates for CreditCards.com released last week.

The researchers spoke to 1,002 adults living in the US, between June 22 and June 25. The responses they got revealed sharp gender, regional, racial and even partisan divides when it comes to tipping practices.

The best tippers are men, Republicans and Northeasterners, all of whom tip a median of 20 percent when dining out. At the other end of the spectrum, the median tip was 16 percent from women and Democrats, while Southerners are slightly stingier, at 15 percent.

The best tippers are men, Republicans and Northeasterners, all of whom tip a median of 20 percent when dining out.

Darron Cordosa, who has worked at a small neighborhood restaurant in Sunnyside, Queens, for the past seven years, says he sizes up his customers based on both gender and age.

“Of course, most of my customers are regulars, so I already know what to expect,” he says. “But when I look at a table of four 21-year-olds, I usually can expect not too much.”

Sizing up the prospects by gender, Cordosa admits that if he had “to choose between a table of men and a table of women, most of the time I would be inclined to go with the men.”
But there are exceptions to every generalization, as Cordosa points out.

“I have been surprised by a 21-year-old who leaves a tremendous tip, and disappointed by a middle-aged white man,” he recounts.

Of course, tipping habits are as much a function of income and wealth as they are of gender and political affiliation, and that is borne out by talking to the people who run Delmonico’s, a high-end Beaver Street steakhouse that has helped Wall Streeters celebrate their deals and bonuses for 180 years.

“Our clients are pretty generous,” says Carin Sarafian, director of sales and marketing at Delmonico’s. “So our servers get tipped very well.”

“I’ve been in the restaurant business all my life,” says Delmonico’s waiter Albert Bradica. “What we find here at Delmonico’s is a very sophisticated crowd that tips 20 percent, 95 percent of the time. For extra attention, I can get 25 percent to 30 percent.”

Since his customers already know they are going to spend a lot of money and act accordingly, he says tipping doesn’t vary as much based on gender and other attributes as it may in other eateries.

In restaurant lingo, “tip out” is a practice where staff members who receive tips distribute a portion of those tips to other co-workers who are involved in the chain-of-service to customers. Typically, this means that servers and bartenders give a portion of their tips to bussers, runners, and sometimes kitchen staff.

Note: Customers can leave tips via cash, check, or credit card. However, if you add a required service charge to their order, you cannot treat them as tips. To learn more about the types of tips your employees can use, click on the buttons below:

• Cash
• Debit or Credit Card
• Check
• Service Charges

Although electronic payment methods continue to dominate in business, some customers still pay cash tips. When your employees receive cash tips, the money is pooled and divided after the shift, and they typically take them home the same night. There have been cases in which employers hav e held the cash to distribute at the end of the week or with the next payroll, but due to the changing tip pooling laws, you should seek legal counsel before doing so.

Because they’re so easy to use and many customers don’t carry cash, debit and credit card tips are on the rise. When your employees receive tips per electronic transactions, you can hold, pool, divide, and pay them out with their paychecks. The best payroll software includes tip reporting to make it easy for you to track taxable tips, too.

You can also choose to perform the redistribution calculations at the end of each shift and distribute them in cash, if you have enough on hand. This can be time-consuming, so you should evaluate your schedule before implementing.

If you’re charged a fee to process the debit or credit card tips, federal law allows you to deduct them from the tips you distribute. Check your state’s law before implementing to ensure there’s no policy to restrict you from doing this legally. For instance, if you’re in California, you’re prohibited from deducting credit card fees from employee tips.

If your restaurant still accepts check payments (many don’t), some customers may choose to pay tips that way. Similar to how you handle electronic payments, you have the option of pooling the tips and paying them in cash at the end of each shift or waiting until you cash the check and paying out with payroll. You could also cash the checks prior to processing payroll and pay out in cash before the next pay day.

Service charges are automatic gratuities, usually based on a percentage of the total bill, that customers are required to pay. Some high-end restaurants charge all of their customers service charges, while others only charge them to large parties, for example, 20% for a party of more than eight people.

Because service charges are required, they aren’t considered tips, even if you pay a portion or all of them to employees. You can divide the tips among employees however you wish, but it’s not considered tip pooling. Service charges must ultimately be reported as income to the business, and any gratuities you pay out to employees are wages.

How Tip Out Works

In many restaurants, tipped staff rely on tips as a large portion of their wages. The Federal Labor Standards Act (FLSA) sets the minimum wage for tipped employees at $2.13 per hour, allowing bar and restaurant owners to apply the tips their staff earns toward the full federal minimum wage of $7.25 per hour. The difference between the tipped minimum wage and the prevailing minimum wage is referred to as a “tip credit.”

Many states and cities set their own, more restrictive, regulations regarding tips and minimum wages. Currently 17 states rely on the FLSA $2.13 per hour minimum wage for tipped employees, 26 states set a tipped-minimum wage that is higher than $2.13, and seven states require employers to pay tipped staff the full minimum wage. The Wage and Hour Division of the Department of Labor keeps an updated list. Restaurant owners should still check their local labor laws to ensure they are in compliance, which is a big part of restaurant management.

Most tips, or gratuities, in a restaurant are applied to the check at the end of a meal. This means that the majority of tips are directly given to a server or a bartender. Other positions like bussers, and barbacks don’t have access in the point of sale to ring in orders or process payments. So at the end of a shift, servers or bartenders who collected tips give a portion of those tips to the other service staff who supported the customer experience.

Most restaurant tips are paid via credit card

Early in hospitality history, the tip out was an informal system where a server might hand a few dollars to the busser who paid special attention to their station. There was, however, also the potential for staff to game the system with the promise of a generous tip out.

Here are a few examples of how servers could use a tip out to their advantage:

• Clever servers might over-tip the bartenders to get their drinks made first.
• A clever waiter could promise the hostess extra money to seat big parties in their station.
• A bartender who tips out a higher percentage to barbacks might get their bar restocked faster than a bartender in another station.

To establish a sense of fairness, and to prevent poor service from overloaded staff, restaurant owners began creating guidelines for tip outs. Setting a standard for tip outs in your restaurant is generally accepted in most states. There are some states that set more restrictive standards, so you should check local labor laws before deciding how your restaurant will handle tips.

Choosing a Tip Out Method

Not all restaurants use tip outs. Some restaurant owners collect mandatory service charges and use these to pay higher hourly wages to all of their staff. It is important to note that, in the eyes of the Internal Revenue Service (IRS), mandatory service charges or “automatic” gratuities are classified as revenue to the business, and will be taxed as revenue.

When service charges are used as wages, they are not considered tips. In order to be categorized as a tip to the service staff, a gratuity must be voluntarily applied by a customer.

Many restaurants that choose a tip-less model find it is less administratively tedious to process their payroll. Restaurants choosing to follow a tip-less model should still prepare to track and pay additional payroll and withholding taxes on service charges that are used as wages.

Servers are not the only restaurant staff that can receive tips

Employers should also know the difference between voluntary tip sharing arrangements and mandatory tip pools. Tip sharing is when a tipped staff member voluntarily chooses to give a portion of her tips to a co-worker, or a group of tipped staff members agree among themselves to arrange and operate a tip pool. This type of tip-out is not enforced or arranged by the employer; it is completely voluntary.

A mandatory tip pool is where the employer sets the tip out percentages and ensures that the staff sticks to them. Some states prevent employers from mandating or enforcing a tip pool. Employers considering using a tip-pooling model for tip out should consult their local labor laws to ensure they are within the law.

Employers setting a tip-out policy should also check local laws that restrict who may or may not be included in a tip pool. Supervisors and managers are typically prohibited from being included in a tip pool. Under certain circumstances, kitchen staff can be included in a tip out or tip pooling arrangement.

A tip out model can be a good fit for:

• Full-service restaurants: Restaurants with multiple service positions in the dining room—host, server, bartender, barback, busser, runner, expo, barista—tend to rely on a tip out model to incentivize good customer service through all positions.
• Quick-service restaurants: Quick service restaurants that have few levels of staff to support customer service usually have at least one service position that does not generate revenue. These restaurants with fewer front-of-house staff members may also tip out the kitchen team or dishwashing staff if local law permits.

Including kitchen staff in tip pools was once prohibited by the Fair Labor Standards Act (FLSA). This legislation was updated in late 2018, and now permits tips and gratuities to be shared between the front- and back-of-house when certain conditions are met.

• Counter service restaurants: Counter service restaurants like coffee shops and sandwich shops typically operate with a simple tip pool where the tip monies that are collected in a shift are distributed evenly by everyone who worked that day. Though sometimes these smaller shops choose to run their tip pool by the week. This ensures that teams working slower shifts share in the wealth generated at busier times.

Most restaurants use a form of tip out or tip pool in the course of their business. Restaurants come in various sizes and service styles, so there are almost as many strategies to distributing tips as there are types of restaurants.

Many restaurants figure tip outs by hand at the end of a shifts

Tip Out Methods

Now that you know what a tip out is, you can design a tip out system that will work for your restaurant. Because federal laws governing tip distribution change regularly and state laws vary widely, there are few third-party solutions ready to solve the tip out problem. For the most part, restaurant owners must design and enforce their own models and tracking systems.

Any good tip out system starts with having an accurate record of each service staff members’ sales and tips per shift. The best tool a restaurant operator can have when figuring a tip out or tip pool at the end of a shift is a solid point-of-sale system that generates detailed end of shift reports by server, and that can separate the food sales from the beverage sales.

Most restaurants operate with one of the following models for tip out:

1. Tip Out as a Percentage of Tips

This is the most straightforward way to distribute tips among a service team. Each supporting service position is assigned a percentage of tips based on their level of responsibility. Usually the total amount “tipped out” is between 20% to 45% of a server’s total tips.

In a casual full service restaurant, a server might tip out 25% of her total tips to her colleagues like this:

• Bartender: 10%
• Busser: 7%
• Runner: 5%
• Host: 3%

In the example above , the server retained 75% of her total tips for the service. If her total tips were $100, she would retain $75, and she would give:

• $10 to the bartender who made her drinks
• $7 to the busser who cleared & reset her tables
• $5 to the runner who ran out the food
• $3 to the host who greeted and seated the guests

The percentages per position vary from restaurant to restaurant depending on the level of responsibility in each of the roles, as well as their style of service. If there is no food runner and the bussers run food, then bussers might be tipped 10%. If a restaurant only offers wine and beer service a bartender might be tipped out a lower percentage, or there might be no bartender to tip out.

A note on bartenders: They are typically the only ones in a tip out system that both gives and receives tips outs. Just like servers, bartenders open and close checks, but they also support the servers by making their drinks.

The benefit of basing the tip out on a percentage of total tips is that if a server or bartender has several low tipping guests the loss will be shared by the rest of the team. Some other models can leave a server in that situation bearing all the losses.

2. Tip Out as a Percentage of Sales

Another option is to base your tip out amounts on a percentage of a server or bartender’s sales. In this model the amount of the tip out is tied to the revenue center the item sold comes from. So a server would tip out a bartender based only her beverage sales and tip out a food runner based only on food sales.

Tip Outs can be figured as a percentage of sales, or a percentage of total tips

In a percentage-of-sales model, a server might tip out her co-workers like this:

• 10% of beer/wine/liquor/beverage sales to the bartender
• 3% of food sales to the runner
• 3% of total sales to the busser
• 1% of total sales to the host

So if our server sold $100 in alcohol, she would tip out the bartender $10. If she sold $400 in food, the runner would get $12. The busser would receive $15 (3% of our server’s total $500 in combined food & beverage sales), and the host $5.

If our server in the above example was tipped an average of 20% by her customers on that $500 in sales, she would have $100 in total tips. She would tip out $42 to her co-workers and keep $68 in tips for herself. If, however, this server had a table that did not leave a tip, and brought her total tips down to $80, she would still be expected to tip out $42 to her co-workers based on her sales, leaving her with $38 for herself.

Some restaurants like a percentage of sales system because it seems like a more accurate distribution based on each role. A system like this can be more of a direct incentive to support staff; it makes sense for a bartender who is tipped out on beverage sales to make drinks quickly so more can be sold and ordered. Critics of this system say that it can unfairly burden servers when tips are low.

3. Tip Pooling Based on Points

Tip pools are a slightly more complicated form of tipping out. In the case of a pool, however, all the tips given by customers in a single service are combined into one pot. The pooled tips are then distributed to service staff based on a predetermined formula.

A tip pool based on points begins with assigning a number to each service position based on its level of responsibility. This number becomes that staff member’s “points in the pool.” Typically servers and bartenders are assigned the highest number of points because of their level of interaction with the guests and their unique position to increase sales.

A typical points breakdown might look like this:

• Server: 10 points
• Bartender: 9 points
• Busser/ Barback: 5 points
• Food Runner: 7 points
• Host: 2 points

At the end of a shift, all the tips from all the servers and bartenders are added together. Then all of the points for all of the staff that worked that shift are added together as well. On a shift with two servers, one busser, one barback, one food runner, and one host, the points would add up like this:

Role

Points

Server 1

10

Server 2

10

Bartender

9

Busser

5

Barback

5

Food Runner

7

Host

2

Total

48

The total tips would be divided by the total points in the pool, to figure how much each “point” is worth. If the team above was splitting a pool of $500 in tips, then each point would be worth $10.42 ($500 / 48). To get the final tip amount per employee, you would then multiply their number of points by that number:

Role

Points

Tips

Server 1

10

$104.17

Server 2

10

$104.17

Bartender

9

$93.75

Busser

5

$52.08

Barback

5

$52.08

Food Runner

7

$72.92

Host

2

$20.83

total:

48

$500.00

1 point is worth:

$10.42

Most restaurants that operate with a points-based pool format a spreadsheet with the formulas in each cell so that the tips and points can be input at the end of each shift. It is important to continue to regularly check that spreadsheet for accuracy. Using a spreadsheet to do the math can sometimes give a false sense of security that everything is perfect, but where your employee’s tips are concerned, a restaurant owner can never be too careful.

Once tip pools are distributed either in cash at the end of the shift or on employees’ paychecks, an employer cannot request those tips be returned, even if there was an error. So if an employee was overpaid a portion in tips due to a mathematical error, they are not obligated to return the overpaid tips to the pool. If, after tips are distributed, you or your staff find that there was an error, the employer is typically responsible for paying out the corrected amount of tips to employees who were shorted or left out of the pool.

4. Tip pooling based on hours

This is simple pool where the tips are distributed based on the number of hours a staff member worked. It is very similar to a pool based on points; in this case the employee’s points are the number of hours he or she worked.

In an hours-based pool, all of the tips are added together in a single pool. Then the number of total hours worked by every staff member in the pool is added together. The total tips are divided by the total hours worked. This number gives you the “worth” of one hour, just as with a points-based pool. This number is then multiplied by an individual staff member’s hours worked to arrive at that person’s share of the tips.

(Total tips / Total hours worked) x Individual hours worked = Individual tip

Many coffee shops pool tips based on hours worked

Let’s say a team of six people worked six-hour shifts and brought in $500 in tips between them. The total hours worked would be 6 x 6, which equals 36 hours. We would figure one individual server’s tips in this way:

($500/ 36) x 6 = $83.33

In this case, each of the six people in this tip pool would receive $83.33 in tips from the tip pool.

Coffee shops and other counter-style operations that collect cash tips in a tip jar tend to use a version of an hours based pool for tip distribution. Because their tips tend to be less money than at a full service restaurant, a coffee shop may pool all the tips for a week and distribute them to their baristas based on the number of hours they worked for the entire week or pay period.

An hours-based pool that runs by the week or pay period can be a good fit for a small counter service operation. It encourages staff to work as a team across shifts and makes it easier for an owner or manager to schedule staff for shifts that are typically slower and there is be less potential to earn tips.

5. Tip Pooling Based on Points and Hours

This is where all the tip out options come together to create a highly tailored tip pool. Many fine dining restaurants with a large team of supporting service staff tend to use this model. It is very detailed, and restaurants that use this model tend to rely heavily on spreadsheets to perform the math for them at the end of a shift. A points-and-hours tip pool begins just like the points system, with assigning a number of points to each service position based on its level of responsibility.

To begin figuring this pool, you need to gather:

• Each employee’s total hours worked for the shift
• Each employee’s points based on their role
• The combined dollar amount of tips put into the pool

Then figure each employee’s total points for the shift by multiplying their hours worked by their role-based points.

Let’s assume a busser role has five points in the restaurant’s tip pool. A busser who works an eight hour shift would then earn 40 points (5 x 8) in that shift’s tip pool. You need to figure each employee’s total points for the shift. Once you have each individual’s total points, add all their point totals together to get the combined points for the entire pool.

Role

Points

Hours

Total Points

Server 1

10

8

80

Server 2

10

4

40

Bartender

10

8

80

Barback

5

4

20

Busser

5

8

40

Food Runner

7

8

56

Host

3

4

12

Total:

50

44

328

Now you should have the total points for each individual in the tip pool as well as the combined point total for the entire pool. To figure each individual’s allocation of the tips, you next must divide their individual point total by the combined point total and multiply that number by the combined tip total.

(Individual Point Total / Combined Point total) x Tip Total $ = Individual Tip Allocation

Let’s look at the busser from the previous example. He worked eight hours, at five points per hour for a total of 40 points for the shift. If the sum of all of the individual hours and points in the pool is 328, and there are $500 total tips in the pool, then his tip allocation would be figured like this:

(40 / 328) x $500.00 = $60.98

It sounds complicated, and with a large team it can be. Many restaurant teams that rely on a points and hours based tip pool create a spreadsheet like this to figure each pool member’s portion of the tips.

Role

Points

Hours

Total Points

Tips In

Tips Out

Server 1

10

8

80

$200.00

$121.95

Server 2

10

4

40

$100.00

$60.98

Bartender

10

8

80

$200.00

$121.95

Barback

5

4

20

$0

$30.49

Busser

5

8

40

$0

$60.98

Food Runner

7

8

56

$0

$85.37

Host

3

4

12

$0

$18.29

Total:

50

44

328

$500.00

$500.00

In this example, two servers and one bartender contributed a combined total of $500 in tips to the tip pool. Some service staff worked an eight hour shift while some worked only four hours. To split the tips equitably, the team members that worked the most hours received the highest portion of tips.

While this system is the most complicated, many restaurants find that it is the most flexible. A points-and-hours system allows managers to cut staff when business slows while still honoring everyone’s contribution when the tips are allocated at the end of the shift.

Tip Out Costs

There is more to consider about tip out than the size of everyone’s portion. Any business that handles or distributes gratuities will incur related costs. Beyond the standard payroll taxes, there are credit card processing fees associated with credit card tips. The more detailed your tip structure, the more managerial time you will need to spend overseeing it.

These are a few costs of administering a tip pool that a restaurant owner should be prepared for:

• Credit card processing fees: 70%-80% of your customers will tip with a credit card. Like the rest of your credit card payments, your business will incur a 3%-4% processing fee from your merchant services provider. Some states permit restaurant owners to retain this amount from employee tips. Your local department of labor website will have accurate information about your city or state guidelines.
• Payroll taxes: If tipped employees earn more than $20 per month in tips, employers are obligated to withhold Social Security, Medicare, and income taxes from the reported tips, as well as paying the employer’s portion of Federal Unemployment Tax (FUTA) and Federal Insurance Contribution (FICA) on reported tips.
• Employee complaints: Restaurants from TGI Fridays to high end restaurants like Per Se have been sued by employees alleging wage theft due to mis-allocation of tips. A complaint doesn’t need to reach the level of a lawsuit to cost a restaurant owner money. An employee complaint to the Wage and Hour Division of the Department of Labor can spur an investigation into your payroll records. Any errors they find can result in fines.
• Administrative time: It is important not to underestimate the time and manager attention that enforcing a tip pool can take. The more complicated the tip pool, the more oversight is generally needed both to enforce the guidelines among the staff and to handle staff inquiries about the tip pool.

Managers and owners also must ensure that tips are accurately recorded for your payroll processor so the correct amount of withholding can be applied. Restaurants that pay out all tips in cash at the end of shift should also consider the administrative time necessary to arrange change orders and make trips to the bank to replenish the cash supply.

Restaurants that pay tips in cash at the end of shift need to be sure they have enough cash on hand

In some states, restaurant owners can apply tips to cover a portion of their tipped employees’ wages. This “tip credit” allows a restaurant owner to pay tipped employees an hourly wage that is below the federal or local minimum wage. It is important for an employer claiming a tip credit to ensure that tipped staff must make at least $120 per month in tips and that the combined total of tipped employees’ wages and tips add up to the prevailing minimum wage for their hours worked.

If these requirements are not met, employers claiming a tip credit may be liable to employee complaints. And such complaints can lead to fines from the Department of Labor or legal fees and settlements if employees file a complaint for wage theft.

A recent update to the FLSA now permits employers who do not claim a tip credit to include kitchen staff in tip outs and tip pools. Still, local laws may vary, so it is important to check labor codes that govern your location. Under federal law, however, restaurants that pay their staff the full, mandated minimum wage may now include cooks, dishwashers, and other back of house roles in a tip pool.

Pros & Cons of Tip Outs

There are almost as many ways to compensate service staff as there are types of restaurants. What works for one business may not be the best solution for another, so it is important to consider all the pros and cons before choosing a direction for your business.

Pros of the Tip Out

Restaurants that rely on tip outs like the fact that they:

• Spread the wealth: Sharing or pooling tips across the staff makes the compensation more equitable across a restaurant, which usually increases teamwork and staff morale.
• Create performance incentives: When all of the service staff earn a portion of tips, they are incentivized to help increase sales and provide a high level of customer service.
• Are familiar to employees: Most seasoned restaurant teams are already familiar with receiving tips, pooling tips, and tipping out colleagues. It is a relatively transparent system that enables the staff to directly see compensation for their efforts.

Cons of the Tip out

There are also some potential negatives to tip outs and tip pools that restaurant owners should consider:

• Over-competition can impede service: Unregulated tip outs can lead to “deals” among the service staff that can negatively impact guest experience. If one server has agreed to pay the host more in tip out than another server to ensure she seats the best tables in his station, that server could easily get overwhelmed while his co-workers are left with nothing to do and no incentive to help.
• Staff can feel unequal. Even with the most thoughtfully designed tip out system, some staff members can feel disgruntled that other roles are offered more points in a pool, or a higher percentage of tips.
• Record keeping takes time: Designing and enforcing a tip pool takes time every day. The more complicated the tip out or pooling arrangement, the more time it can take. It is worthwhile for restaurant owners and managers to consider if this is time well spent, or if their skills are more valuable performing other tasks.
• Mistakes (even honest ones) can be costly: Mis-allocated tips or mis-applied tip credits can be considered wage theft, and result in lawsuits or employee complaints to the Department of Labor. These complaints can result in fines, settlements, or—in some states—liens placed on the business.

Tip Out Frequently Asked Questions (FAQs)

Processing tips and tip outs can be complicated. There are many moving pieces to consider. We have answered some common questions below.

Can tip out include the kitchen staff?

Earlier versions of the FLSA prohibited distributing tips to staff members that were not directly “in the chain of service” tableside. A 2018 update to the FLSA, however, permits some staff members who are not in the dining room to be included in tip pools.

In order to include kitchen staff in a tip pool, the employer must:

• Pay all of their staff the full minimum wage.
• Not claim a “tip credit” for any of their staff.

The FLSA update does not permit restaurants claiming a tip credit to distribute tips to staff that are not directly involved in the chain of service.

Can managers enforce tip out percentages?

Most states permit a restaurant owner or manager to set tip out and tip pool standards for their service staff. Generally these policies must be in writing and must be clearly explained to all staff that will be entered into the pool. It is a good idea to have written copies of your tip policy to post in employee areas as well as have each of your tipped staff sign a copy that you keep in their personnel file.

Can restaurant owners recoup credit card processing fees for credit card tips?

If an employer pays a processing fee to a merchant service to accept credit cards from customers (such as 3%), laws in some states permit them to retain the credit card processing fee from employees’ tips that are paid via credit card. In most cases, an employer would be required to notify the employee of the practice in writing before withholding these amounts.

In addition to notifying employees in writing, restaurant owners who transfer the costs of credit card transaction fees to their tipped staff must also:

• Keep an accurate record of these charges.
• Only charge the fee that they pay to their credit card processor.
• Charge the fee to the correct employee.

Restaurants that claim a tip credit have an additional consideration. The FLSA does not permit recouping credit card fees if recouping those fees would place the employee’s total pay below federally mandated minimum wage.

Do restaurant owners pay payroll taxes on tips?

If tipped employees earn more than $20 per month in tips, employers are obligated to withhold Social Security, Medicare, and income taxes from the reported tips, as well as paying the employer’s portion of Federal Unemployment Tax (FUTA) and Federal Insurance Contribution (FICA) on reported tips. It is a good idea to have all tipped employees track their tips on IRS form 4070-A to ensure that the appropriate taxes are being withheld.

How quickly must a restaurant owner distribute tips?

This varies a bit state to state, but generally credit card tips must be paid out by the next pay period. In some states cash tips can also be collected by the restaurant and distributed on the next paycheck. Most restaurants, however, opt to permit service staff to retain, distribute, and report cash tips separately from credit card tips. Typically the service staff would distribute the cash among themselves at the end of the shift, and report those totals to the restaurant manager so they can be logged for tax withholding purposes.

Restaurants that treat cash tips separately from credit card tips should make IRS Form 4070-A available to their employees to ensure that cash tips are being recorded and reported for tax withholding purposes.

Bottom Line – What is Tip Out?

Tip outs and tip pools have been a part of the restaurant business model for generations. There may be no single solution that works for every restaurant. The best place to begin deciding which tip out model is right for your business is with the federal and local labor laws that govern tips and service charges in your area. Whichever model you choose, be sure that you are reporting all tips received by and distributed to your employees so that the appropriate taxes can be withheld.

How much of the tip does the server keep?

Does the server keep all the tip?