Many people who work in the restaurant industry make a large portion of their income from tips. In casual restaurants, servers and bartenders are often tipped directly by the customers they serve, in the form of cash or as additional payment on the credit or debit card charge. These employees may then give a portion of their gratuities to bussers, food runners, hosts, or other staff members who helped them during their shift.
In quick-service restaurants, tips are often shared among the staff members who work together during a shift. They can be collected as cash in a tip jar or as an additional payment on credit or debit card charges.
If you own a restaurant, don’t make the mistake of thinking your employee’s tips aren’t your concern. Gratuities are income and it’s your responsibility as a business owner to properly report the wages your employees earn.
Furthermore, your employees likely rely on the supplemental income tips provide. As their employer, you should take steps to ensure everyone is compensated correctly and fairly.
Your responsibilities as an employer
All business owners are responsible for accurately reporting each employees wages to the IRS and withholding their income and FICA taxes. In order to do so, your staff members need to tell you the gratuities they earned so you can keep a running record. It’s a good practice to have each employee report their daily tips at the end of their shift.
You’ll then report this information and pay withholdings to the IRS. Some larger restaurants are also required to file Form 8027, which outlines the total amount of gratuities collected and reported by employees.
How to manage tips in your restaurant
No matter what system your restaurant has for handling tips, the process of tracking, reporting, and paying out gratuities to your employees is an extremely labor intensive task – and one fraught with potential errors and missteps. Here a few ways you can manage tips in your restaurant, so both your staff and the IRS stay happy.
Take advantage of technology
It has become much easier in recent years for restaurants to track gratuities using cloud technology. Cloud-based Point-of-Sale (POS) systems for restaurants are not only able to accurately record the tip amount on each transaction. These systems are also able to automatically import the data into your cloud accounting and payroll software, updating your general ledger and employee wage records.
Using the latest technology available to restaurants, you can automate much of your recordkeeping and confidently know the data is accurate.
Have a company policy on tips
There isn’t one right way to manage tips, but you can make the process easier by creating a straightforward and transparent policy for your entire staff to follow. You may allow your servers to keep their gratuities and tip out a certain percentage to the support staff or you might set up a tip pooling system.
An effective tip policy will match your specific business and work with the tools you have at your disposal, such as the gratuity tracking features in your POS systems.
Make sure your employees understand your policy
Once you form a gratuity policy, it’s recommended that you document and distribute it to each staff member when they’re hired. It should clearly outline your restaurant’s process for handling tips and how employees are expected to report the gratuities they collect.
And for your employee’s benefit, your policy should include a grievance process in case problems do occur. Having a transparent policy that you share with your employees when they’re hired will help build trust and prevent problems.
Financial professionals can help
Partnering with a professional bookkeeper and accountant can ensure your financial records are properly kept and your taxes are filed correctly and on time. Your bookkeeper can categorize and reconcile the transactions imported from your POS system and manage your payroll. Your accountant can prepare your taxes and provide strategic tax planning advice. You can learn more about the differences between bookkeepers and accountants here.
BookKeeping Express (BKE) is the leader in full-service accounting and bookkeeping for quick-service restaurants. We can help your restaurant account for gratuities and even help you pick the right POS and payroll provider for your specific needs. Visit bookkeepingexpress.com/industry-solutions/restaurants to learn more.