Tips Divided: Reporting Tip Income When Your Employees Share a Tip Pool
6 min. Read
Last Updated: 07/05/2023
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Many restaurant employees depend on the tips they make each day. For restaurant owners, reporting tip income can be a burden if they have several tipped employees, and things like tip pools or other tip sharing arrangements can make things even more complicated. Let's look at some of the aspects of tip pools and how they may affect your decision to use a tip pool in your restaurant.
What Is Tip Pooling?
Tip pooling is a common practice in the restaurant industry in which restaurant employees combine their tips and divide them evenly among the tipped staff. The tip pool often includes servers, bartenders, food runners, and other front-of-house staff who regularly and customarily receive tips. Tip pooling can be beneficial for both the employer and employees, as it promotes a team-oriented atmosphere and helps to ensure that all staff members receive a fair share of the tips. Restaurant owners may want to use tip pooling as it can increase staff morale and productivity, reduce turnover, and simplify payroll and tip reporting. However, it's important to note that tip pooling must be implemented in compliance with any applicable federal, state, or local laws.
How Does Tip Pooling Work?
A tip pooling system typically starts with clearly defined rules on who does and does not participate, and how the tips are distributed. Typically, restaurants pool tips from all servers, bartenders, food runners, and bussers who serve customers. However, staff who do not customarily and regularly receive tips, such as managers, dishwashers, and cooks, aren't usually part of the tip pool. The tips are then divided according to an agreed-upon method, typically based on the number of hours worked. For example, someone who works an eight-hour shift would receive more tips than someone who only worked a four-hour shift. However, restaurants must ensure that the distribution process is equitable and not simply based on seniority or other factors that could lead to unfairness. Additionally, certain states may have rules on whether employers can take tip credits when tip pooling is involved.
How To Calculate a Tip Pool
A key element of calculating a tip pool is equitable distribution. While that term could mean different things in different environments, it's important that the restaurant has a fair, consistent way of dividing up the tip pool so that all employees can understand the process and feel confident that they have been compensated according to the rules of the tip pool.
One of the most straightforward ways to do this is by having all tipped employees contribute 100% of their tips, then dividing them up equally for every tipped employee on the shift by a percentage based on hours worked during the shift. For example, if two servers, a bartender, and a host each pooled tips totaling $500 over a four-hour shift, each employee would get $125 ($500 / 4 employees = $125 per employee), assuming they all worked the entire four-hour period.
If some employees work longer than others, those employees would get a larger percentage of the tip pool. In the same example, if the bartender and server 1 worked four hours, while the host and server 2 worked only two hours, the tip pool would be divided by 12 total employee hours, giving each employee $41.67 per hour worked ($166.68 for the bartender and server 1 and $83.34 for the host and server 2).
A straightforward division of tips isn't always the best strategy for every work environment, however. If there is a large disparity in seniority and experience on a team, more senior employees may feel unhappy if they are consistently bringing more tips into the pool but getting paid out the same as newer employees who work the same number of hours. Tip pools can be distributed based on hours, position, experience, or several other factors as long as the distribution methods and calculations comply with any applicable federal, state, and/or local laws, and are clearly explained to all employees during the onboarding process.
Tip Pooling Laws Employers Should Know
As an employer, you must comply with any and all federal, state, and local requirements concerning tips received by all employees. For the purposes of reporting tip income, however, the U.S. Department of Labor classifies tipped employees as those who customarily and regularly receive more than $30 per month in tips.
While the responsibility for honestly and accurately reporting all tips (both credit card and cash) falls to the employee, the employer is responsible for meeting all other aspects of the federal reporting requirements. These include but are not limited to:
- Educating and training all employees on proper reporting methods for tips
- Gathering tip reports from each employee at least once per month
- Paying FICA and state income taxes on employee tipped income
- Filing IRS Form 8027 if your restaurant regularly accepts tips and employs more than 10 workers
- Applying for the FICA Tip Tax Credit on IRS Form 8846 if desired
- Ensuring that tip reporting for all employees meets the federal minimum threshold of 8% of gross receipts
- Verifying the accuracy of the reports with any employee who does not meet the minimum threshold and applying for a special exception with the IRS
Creating a Tip Pooling Policy for Your Organization
While employers are generally prohibited from retaining any part of an employee's tips, the federal statutes do allow employers to organize a tip pooling arrangement for tipped employees. Tip pools can be organized on a flat amount basis, by a point system, or on a percentage basis. Regardless of how the tip pool is organized, it's best practice to keep a consistent system for tracking and reporting tips that is clear and easy to follow for all employees. If your tip pool is mandatory, the tip pooling policy must also be clearly outlined for all new employees upon hire.
Tip Pooling Pros and Cons
As a restaurant owner or manager, implementing a tip pool has both advantages and disadvantages to consider. The weight of pros and cons will be different based on the experience mix of your team, number of employees, average work hours per week, and several other factors. As with any decision in business, it's important to consider how a tip pooling arrangement would affect your operation before implementing one.
Benefits of Tip Pools
With the extra maintenance and reporting requirements, some employers may question whether a tip pool is worthwhile. For some smaller restaurants, it may not be.
Tip pools generally benefit employers most when there is a significant disparity between key positions in the daily operations of the restaurant. For example, if your restaurant uses a host staff, the hosts often do not receive tips and usually make a minimal hourly wage in comparison to wait staff or bartenders once tips are considered. Without a tip pool, you may find it difficult to find employees willing to fill this important role. By allowing hosts to participate in the tip pool, employers can offer an extra incentive for qualified employees to stay in this position.
Employers can also organize tip pools to benefit employees willing to work otherwise-undesirable shifts. When organized and used properly, a tip pooling arrangement can be an important tool for meeting staffing needs.
Challenges of Tip Pools
Ensuring that all employees are treated fairly when it comes to tipping is no easy task, and even with a tip pool, employers are still likely to face some challenges with tipped employees. Collecting, calculating, tracking, and distributing tips can put a considerable amount of extra work on the employer, especially if there are many employees on every shift. Managing the pool can be even more difficult when employee start and stop times carry over across different shifts.
When disputes arise over division of tips, this can also add complexity to employer/employee relationships and put managers in an awkward position if mistakes are made in the calculation process. Mistakes can also open the employer up to penalties or fines, especially if they are out of compliance with relevant employment laws and regulations. To minimize risk, employers must follow tip pooling best practices and proactively keep on top of any changes that affect how tip pools can be implemented.
Tip Pooling vs. Tip Sharing
Some restaurants may opt for a voluntary tip sharing arrangement instead of the traditional tip pool. In tip pooling, all tips collected by a group of employees are combined and then evenly distributed amongst the group, regardless of each person's individual performance or contribution.
In contrast, tip sharing allows employees to keep the tips they earn while sharing a portion of their earnings with other team members, such as bartenders or bussers. Typically tip sharing is done at the discretion of each tipped employee to encourage other team members to prioritize tasks that earn higher tips. For example, a server may share tips with a busser to encourage them to clean their tables faster, allowing the server to get more customers and ultimately earn more money.
Other Tip Pooling Considerations
A final important consideration when reporting tip income for your restaurant involves how the tip pool may affect your bottom line. You may qualify for the FICA Tip Tax Credit if your company meets certain basic requirements. However, a tip pool could affect how much of a credit you can claim. On the other hand, a tip pool could help offset the minimum wage requirement for employees who may not otherwise receive enough in tips to make up the difference. Finally, it could cost your organization a significant amount of time, and ultimately money, to manage and enforce a tip pool. All of these considerations, both positive and negative, can help you determine if a tip pool is right for your restaurant.