Tip management

Tips are wages your staff count on, and mistakes in how they're recorded or shared are expensive to fix. A good POS makes the right setup easy and produces the records your payroll provider and accountant need. This guide covers the features and the rules they sit on. It isn't legal or tax advice; your accountant and your state's labor department have the final word.

Tip prompts on the card reader

• Preset choices. Most systems let you set the suggested percentages. Decide whether they're calculated before or after tax, and say so on the screen.
• A clear "no tip" or "custom" option. The IRS lists "digital payment prompts that require a customer to select a tip greater than zero before paying" among its examples of service charges, which are treated as wages, not tips. A prompt that lets guests choose zero keeps a tip a tip.
• Where the prompt appears. At the counter, at the table on a handheld, on kiosks, and on online orders. Many restaurants set different prompts for counter service and table service.

Adjusting tips after authorization

In table service, the card is authorized for the check, and the tip is added afterwards on the receipt or the handheld. The POS should let a server or manager enter the tip before the batch closes, with a record of who entered it.

Card networks limit how far the final amount can exceed the authorization. Visa's guide for restaurant merchants says restaurants, bars and fast-food restaurants may add up to 20% to the authorization amount without liability for authorization-related disputes. That guide dates from 2018, so ask your processor what applies to your account today. Bar tabs work differently, with a pre-authorization; see the bar and nightclub guide.

Tip pools and tip-outs

A tip pool collects tips and shares them by a rule (hours worked, points per role, a fixed percentage). A tip-out has one employee share a set amount, such as a percentage of sales, with others. Federal rules set the outer limits:

• The U.S. Department of Labor says the FLSA "allows employers to require employees to share or 'pool' tips with other eligible employees."
• The same fact sheet says an employer "may not receive tips from such a tip pool and may not allow managers and supervisors to receive tips from the pool."
• If you take a tip credit (paying a tipped employee less than minimum wage in cash), the pool is limited to employees in occupations that customarily receive tips. The DOL also says "an employer must pay a tipped worker at least $2.13 per hour under the FLSA".
• Many states set higher wages or ban the tip credit, and some have their own pooling rules. Check your state.

What the POS should do:

• Record each tip against the employee and the transaction.
• Calculate pool shares from your rule and the hours in the time clock.
• Produce a tip-out report per shift that a manager can check before it goes to payroll.
• Keep managers and supervisors out of the pool automatically, by role.

A dinner shift pools $900 in card tips across three servers who worked 6, 6 and 4 hours and two bussers who worked 5 hours each, with servers at 1 point an hour and bussers at 0.5. That is 16 + 5 = 21 points, about $42.86 a point. Each 6-hour server gets about $257.14, the 4-hour server about $171.43, and each busser about $107.14.

What vendors offer for tip pools

• Square: its help center describes tip pools that split tips "equally or by a fixed percentage".
• SpotOn: tip pooling is part of its Teamwork add-on at $3 per employee per month, with a $75 monthly minimum.

Ask whether pool rules can follow your own policy, and whether the pool uses hours from the POS time clock.

Service charges

An automatic service charge, such as a percentage added to large parties, is not a tip. The IRS says "service charges added to a bill by the employer and distributed to an employee are not tips. The employer must treat service charges as wages", and the DOL says "a compulsory charge for service, for example, 15 percent of the bill, is not considered a tip under the FLSA." In the POS:

• Set service charges up as their own line, not as a "tip".
• Show them separately on receipts and in reports.
• Send them to payroll as wages if you pay them out to staff.

Reporting tips to the IRS

• Employees report tips to you. The IRS says employees should "report all cash tips to the employer, unless the total is less than $20 per month from that employer," and that "no particular IRS form must be used." The old Form 4070 has been made historical. A POS can collect declared cash tips at clock-out.
• Large establishments file Form 8027. The IRS says "employers must annually report to the IRS receipts and tips from their large food or beverage establishments," using a test of whether you "normally employed more than 10 employees on a typical business day during the preceding calendar year." The instructions explain the details, including that fast-food operations work differently. Your POS's sales and tip reports are the data you'll need.

Reports to ask for

• Tips by employee and shift, card and cash separately.
• Tip pool and tip-out calculations, with the rule used.
• Service charges, separate from tips.
• Declared cash tips.
• An export for your payroll provider.

The reporting and labor guide covers scheduling and the time clock.