Add Tips to your Employees' Payroll

Create the Income type for Tips

  1. Open Run Payroll --> Income Types and select Add Income Type.
  2. The Add Income Type window will open; enter a description for the tip payment.
  3. Select either Direct Tips or Indirect Tips. The method you distribute tips to your employees will determine which option you choose:

Direct Tips

Direct tips are paid directly by the customer to the employee. The employer has no control over the tip amount or its distribution. The employer is merely a conduit for the tip from the customer to the employee. Here are some examples of Direct Tips:

  • A customer leaves money on the table at the end of the meal, and the server keeps the whole amount
  • A guest gives a tip directly to a bellhop, door person, car attendant, porter, etc.
  • The employees and not the employer decide how the tips are pooled or shared among employees.
  • A customer includes a tip via credit/debit card. The employer returns the tip amount in cash to the employee at the end of the shift. In exceptional situations, the cash tips could be paid out the day after, for example, if there was not enough available cash on hand.

This income type is non-payable, meaning that employees will not receive the dollar amount for this income type.

Indirect Tips

Indirect Tips, or often referred to as "controlled tips," refers to tips that an employer controls or possesses and pays to the employee. The following are some examples of indirect/controlled tips:

  • The employer adds a mandatory service charge to a client's bill to cover tips
  • The employer adds a percentage to a client's bill to cover tips
  • Tips that are allocated to employees using a tip-sharing formula determined by the employer
  • Tips that an employer includes in his business income, then expenses and redistributes to employees in the form of pay
  • Tips that the employees turn over to their employer, who then distributes them to the employees
  • Cash tips that are deposited into the employer's bank account and become, or are even blended with, the property of the employer and then paid out to the employees

Select this income type if the employees will receive their tips with their payroll. This income type is payable, meaning that employees will receive the dollar amount for this income type, and it will be recorded as taxable income.

  1. Double-check that the rest of the income type settings are correct. Please note that once an income type is created, you cannot modify it.
  2. Select Create to add the income type.

Adding the Tips to Payroll

On the Input payroll screen, select the orange plus icon beside the Earnings heading. Select the income type for tips from the drop-down menu, and a new column will appear.


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