The Ultimate Guide on Tip Splitting for Restaurants
By on Operations | Last updated on 10 July 2018

Tipping is valued in the restaurant industry. This is especially true in areas that make tipping an automatic behavior after every meal, such as the United States. Tipping aids in compensating workers earning at least the minimum wage. Arrangements, such as tipped workers receiving all the tips, leaves the back of the house employees out of the circle causing unfair compensation within the staff.

As a solution, different restaurants adopted tip pooling laws in their system.

With the new regulations amended by the Department of Labor (DOL), we’ll break down the rules to see if tip splitting can benefit your restaurant.

Before we get into the nitty gritty of it all, we first have to define the basics of tip splitting.

What Is Considered A Tip?

According to the Internal Revenue Service (IRS), tips are given in cash, electronic payment (credit cards, debit cards, gift cards) non cash (tickets or other items of value), and pooled tips. Tips are listed to be part of income, therefore they are taxable according to federal law.

Tip Credit

According to TipMetric, tip credit allows employers to pay lower than the minimum wage, provided they receive tips that add up to their salaries, which means only tipped employees are qualified for tip credit. For example, a tipped worker does not reach minimum wage due to the lack of tips, the employer makes up the difference. Fair Labor Standards Act (FLSA) notes that the maximum tip credit is up to $5.12 per hour.

Tip Pool

Tip pooling requires all employees to place all tips made in a “pool” to be redistributed afterwards.

This allows tipped workers, such as wait staff and bartenders, to share their tips with the back of the house, such as dishwashers and cooks. FLSA does not impose full contribution, however, employers may set the contribution as they please, as long as employees are well informed and agree to the terms beforehand.

In all these cases, employers and managers cannot be included in the tip pool.

According to the DOL Wage and Hour Division, employers need to meet a set of requirements for tip splitting:

  • The amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
  • The additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25;
  • That the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
  • That all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement to employees who customarily and regularly receive tips;  
  • That the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

Now that we run down of the basics,, let’s get to how we split the tips. Here we recommend two equitable methods, the Point System method and the Hourly Basis method.

1

Hourly Basis

Traditionally, since salaries are based from on hours an employee clocks in and out of the workplace, it wouldn’t come as a surprise if employers adopted this standard for tip splitting.

Distributing tips based on hours worked distinguishes those who are working full time and part time. Let’s use Tipmetric’s example for tip percentage.

The total amount of pooled tips is divided by the total hours of all the servers during the shift. Then, the answer is multiplied by the hours worked per server.

Total of pooled tips = $900

Server A = 8 hour shift

Server B = 6 hour shift

Server C = 4 hour shift

Total hours worked by all servers = 18

Server A: (900/18) x 8 = 400

Server B: (900/18) x 6 = 300

Server C: (900/18) x 4 = 200

We now have calculated tips ready for distribution from an hourly basis.

2

Point System

Lavu, a POS system provider, mentions that the point system method is the most effective, as it fairly distributes tips among employees set by assigned points. Here’s a sample scenario set by Snagajob:

During one evening, there are five servers, three bussers, one expediter, and two bartenders. The five servers were able to bring in $2,000 worth of tips with the help of the staff members. The manager then pre-assigns points for each staff position.

To compute for the value of a single point for this night shift, add up the total tips made and the total points of the staff.

  • Five servers (10 points each) = 50 points
  • Three bussers (5 points each) = 15 points
  • Two bartenders (5 points each) = 10 points
  • One expediter (5 points)  = 5 points

Total points = 80 points

$2000 worth of tips is divided by 80 total points which equals to $25 per point. Once you got that down, multiple $25 with the number of points each staff member has and you’ll end up with the breakdown of tips for distribution.

  • Server: 10 points x $25 point value = $250
  • Bartender: 5 points x $25 point value = $125
  • Busser: 5 points x $25 point value = $125
  • Expediter: 5 points x $25 point value = $125

Contrary to the sample set above, some restaurants consider putting more points on those working at the back of house due to their labor intensive jobs.

The point system ensures that everyone in the staff is well compensated from the moment the customer walks in the restaurant up until the customer leaves.

After establishing the best methods for pooling tips, it is necessary to implement tip reporting in order to track employee tip credit accurately.  

Tip Report

Tip reporting requires employees to keep track and report tips made to employer every month, provided they earn at least $20 worth of tips. If tips do not reach $20, tips are filed as part of income on tax returns or pay taxes, if applicable.  

Here are the necessary documents for tip reporting.  

For employees:

Form 4070 (Employee’s Report of Tips to Employer)

For owners:

Form 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips)

Tip reporting is especially applicable to large food and drink businesses with more than 10 employees working more than 80 hours, and are employed on a typical business day during the preceding  calendar year.

In an industry where tipping is a customary practice, it’s great to practice transparency by educating yourself and your employees on the requirements needed for tip reporting.  

Tip Benefit

According to Upserve, some restaurants in California strive to stay in business since the minimum wage continues to rise.  Problems such as having a big staff on slow days, when only a few employees were needed for the job, affects a restaurant financially. This situation can be avoided by having a scheduling system that easily monitors and adjusts shifts for slow days.

By having employees compensated with the tips they receive, the employer can focus on other expenses around the restaurant, such as emergency repairs. For convenience, it’s best to utilize an online tip splitting feature for easy computation. And while you’re at it, add some creative tip jar names on the cashier counter.

Since some employees make more in tips than in salaries, tip credit can come in handy, especially for restaurants located in the most competitive areas. Sharing tips with employees, based on hourly basis or point system, can guarantee equal compensation for everyone in the staff. Learning to report tips can encourage an environment of fairness and transparency by monitoring and declaring tips to the government.

All in all, tip splitting is a good idea to delve into for your restaurant business. The equity of tip pooling helps in conditioning happier staff members which can lead to happy customers.