The Ultimate Guide on Tip Splitting for Restaurants
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.
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 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 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.
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.
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.
Industry Insights US |
Cash Tips vs. Credit Card Tips: How different are they?
Tipping in the restaurant industry, especially in the US, is extremely important. It’s as important as having a great head chef leading your back kitchen during a hectic dinner service. If you’re a restaurant owner, you should take tipping very seriously. Not just because tips are helpful to your business but because it also helps your employees earn the wages they need to pay for their cost-of-living. This being said, it’s helpful to be aware of the kinds of tips your restaurant staff are receiving as a restaurant owner. Just to get the obvious out of the way, any kind of tip is a good tip. Whether it’s from cash or credit cards, either option generally has no benefit or drawback for you and your business. What it all boils down to really is how it affects your employees’ wages, which leads into your employees’ happiness and ultimately your business’ workforce success. So let’s take a look at how these different modes of tipping can affect you and your staff. Cash Tips When we’re talking about modes of tipping in terms of your restaurant staff, cash tips are generally preferred. Why? That’s because cash is fast money. t can be taken home by your staff at the end of the night to use it on whatever expenses they might have. Compared to credit card tips, cash tips are easier to count and split amongst your servers, making it possible for them to bring home tips right after dinner service. Another benefit of cash tips is that they don’t have to claim all of their tips on their taxes. People are generally taxed on how much they take home in tips, so it’s in their interest to lower the amount they declare so that they’re taxed less. It’s not that we’re condoning people to resort to tax evasion but servers are taxed on how much they take home in tips so it’s in their interest to lower the amount they declare. It’s simply a way of life. However, even though cash tips seem generally more beneficial, it can pose some headaches for both the server and the restaurant manager or owner. For the servers, the way tips are pooled or split can mean they go home with less, which could end up being a headache for the manager in terms of keeping employees happy. Another issue could be with the amount that the customers can tip in cash. Nowadays, being cashless is becoming more the norm, which could lead to your restaurant staff being short changed on cash tips. And finally, cash tips will be harder to keep track of should you need to take note. Credit Card Tips With the appearance of mobile card readers and digital payment technologies, it has become incredibly rare to carry cash around. This made credit card tips all the more popular for people to use. But what does it mean for your staff exactly? On the upside, credit cards have helped increase the ability for people to be able to tip their servers. If customers don’t have enough cash handy for tipping the restaurant staff, they can always pay their gratuity via plastic. According to Daniel Post Senning of the Emily Post Institute, “Tipping on credit really opens up the possibility to tip exactly what you feel comfortable tipping,” he continues “I think it makes it more possible for more people to tip—it’s not as easy to offer the excuse, ‘Oh I just didn’t have the right change in my pocket so I didn’t do it’, or ‘I did a small amount.’” Another good thing about credit card tips is that all transactions are easily tracked and recorded so that you know you’re tipping out to your staff fairly and accurately. One thing’s for sure, transparency and fairness are always welcome in any business with this system. Seeing as how cash tips are more preferred than their credit card counterparts, there are a bit more drawbacks in receiving credit card tips. One major drawback for staff would be on its timeliness. Since the tip given to your staff isn’t physically present, you as the restaurant manager or owner must check the receipts to determine how much cash each of your servers are owed — which takes time. Your business might also be the type that places credit card tips in the next paycheck — an even longer wait for your staff. Lastly, one of the bigger setbacks in receiving credit card tips are the credit card fees. Merchants have to pay a small fee to the credit card company for each payment processed. It makes sense that the best place to get the payment for those fees are from the credit card tips themselves, which will unfortunately leave less for your staff to take home in the end. What’s the best tip for your restaurant? Which kind of tip would be the best for you and your business? As stated earlier in this article, there is generally no benefit or drawback when it comes to what kind of tip you receive. You could decide to push for cash tips from your customers to give your staff more spendable income by the end of each day or you could decide to go for credit card tips to keep track and stay compliant. But at the end of the day, no matter what you choose, just make sure that it’s you, your business, and your workforce that comes out the winner in the battle of credit card tips vs. cash tips.
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We want you to use our software less. Here are 5 new ways to do it.
Have you ever changed numbers on Excel, and everything else changed too? How long did that take? I’m guessing less than the time it took to read this sentence. What takes seconds now took an entire day for an accountant or bookkeeper in the ‘60s. They had paper spreadsheets back then. So a small adjustment meant recalculating, erasing, and filling out all boxes affected by that number. Manually. So if businesses wanted to know how something affects the bottom line, they need to plan ahead. And pay a day’s wage for someone to work it out. This is just for one change. Accounting tools of the 60s. Groovy. Just because something is used a lot doesn’t mean it works. We’re living in the manual spreadsheets era of workforce management Even with current solutions, workforce management is still mostly manual. Checking timesheets, calling up staff to cover, staying on top of qualifications. What should take a couple of minutes can take hours. In short, more time spent in the back office. Less time spent leading staff, tackling business issues, hitting business goals. Less admin, more ambition You buy software to do everything faster. All Tanda research and development comes down to this: we want you to use us less. Less means the job gets done faster. Less timesheet reviews, less calling around, less communication blocks. More working on the frontline, more business goals, more rest and relaxation. Here are 5 new ways to use Tanda less. 1. Less time behind the desk with Live Feed Wherever you are, see who’s at work — and who’s not. Combined with key alerts and live insights, you can make snap decisions to keep your store, warehouse, or centre well-staffed throughout the day and night. Live Feed on the mobile app Previously, you’d have to get on My Tanda to see who’s clocked-in—which takes some time. Even then, it may not be possible, especially if you’re managing a remote workforce, or travel frequently. How it Works. Live feed lets you keep an eye on staff status on the mobile app. This works across teams and locations, depending on manager permissions. Read more: How key alerts and live insights lead to better customer service. 2. Less time figuring things out with the Training Centre Everything you need to get started with Tanda—from basics to breakthroughs—we’ve put it all in one place. Whether you’re just getting started or refreshing your knowledge, our video tutorials will guide you through in record speed. Tanda Training Centre How it Works. A series of videos that teach you everything from basic set-up to advanced rostering. Learn at your own pace. And if you ever get stuck, the chat button is always there. Access it on my.tanda.co/learn. 3. Less work approving timesheets with Associated Tags No need to assign higher duties tags manually on timesheets — which can be time consuming, especially if you have a large team. Associated tags automatically assigns this when certain staff work in different teams. The associated tags field, located in the team profile. How it Works. Assign the higher duties tag in the team profile. If an employee with that higher duties tag works in that particular team, they’ll immediately receive the higher duties allowance. For more information, visit our help page. 4. Less uncertainty with new Rosters Overview validations Identify unsustainable patterns across time more easily, including overworked or underworked staff; how many staff are going on leave; and staffing levels across multiple weeks. Seeing these inefficient patterns early means you’re likely to avoid them on your next roster (e.g. over-rostering, concurrent leave). Validations on rosters overview. See the full list. How it Works. View as much as a month’s worth of rosters on Rosters Overview‘s easy-to-use interface. Now with all validations of the old weekly roster view. 5. Less clicking around with Qualification Expiry Emails Only see which qualifications need action, when they need to be actioned. You won’t need to go to each staff profile page to review this, which means time saved. This becomes more important as your business grows. An employee qualification email alert How it works. You’ll receive email alerts when staff qualifications are 1) expiring in one month; and 2) have expired. They’ll also be alerted and asked to update their qualifications, if necessary. Tell us what features make you use Tanda less. The only thing we love more than helping you succeed is hearing success stories. We love your feedback. We listen to it all. Send me a direct email at email@example.com. Keep up to date with our latest updates on our full changelog.