RKG Accountants
The restaurant industry has seen a dramatic shift from cash to credit card payments, especially when it comes to employee tips. This brings new responsibilities for owners and managers regarding how tips are handled, reported, and taxed.
Are Credit Card Tips Part of Sales?
Credit card tips are not considered part of a restaurant's gross sales for tax purposes—they are funds collected from customers on behalf of employees, though they flow through your POS system and bank account before distribution. Restaurant sales tax is typically calculated on food and beverage sold, excluding tips.
Credit Card Tip Processing Fees: What Can You Deduct?
Under federal law, you may deduct the proportional credit card fee from the employee's tip—but only the actual fee amount. For example, if the fee is 3% and the tip is $20, you can deduct $0.60 and pay the employee $19.40. State variations apply, and deductions cannot reduce the employee's pay below minimum wage.
Tax Compliance for Credit Card Tips
All tips, including credit card tips, are taxable income for employees. Employers must withhold federal income tax, Social Security, and Medicare taxes, and report tips on W-2 forms at year-end.
Employer Reporting Obligations
Employers are required to report all employee tips to the IRS, maintain accurate records of tips paid out including fee deductions, and ensure tip pooling arrangements only include eligible employees with properly tracked income.
Best Practices for Managing Credit Card Tips
Pay out credit card tips no later than the next scheduled payday, clearly communicate tip policies including any fee deductions, use payroll and POS systems that accurately track and report tips, and stay informed as state and federal rules can change.
Conclusion
Credit card tips are not part of your restaurant's sales for tax purposes, but they are taxable income for employees and must be handled with care. Deduct only actual processing fees where allowed, pay tips promptly, and ensure full compliance with IRS and state reporting rules.