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[00:00:00] If your Point of Sale system or POS system is automatically adding a tip line, do you know if you're actually handling those tips legally? In today's episode, we're breaking down the messy world of tipping, how it works under federal law, what your responsibilities are as a business owner, and why systems like Square and Toast might be steering you wrong if you're not careful.

Tips might seem simple, but when it comes to payroll taxes, employee classification, and reporting, It's anything but. let's talk about it. 



Welcome, guys, to our second episode of season two. We're really excited to be here. As the business grows, we network and meet people. And so, one of those people was an employment attorney, and that kind of spun up this whole conversation that seanna and I are having with you today about tipping and how it works, and how you can make sure that you're doing it right, and who to talk to if you want

some more information. Yes. So we are based in the [00:01:00] us. All our clients are in the us... yes. And if you're a part of the US, you know that we are a heavy tipping culture. Yes. I think so many people would like for that to change. I personally would, but here we are and we are gonna dive into this because... I will just say, we are not employment attorneys,

this is not professional advice, this is not legal advice in any way, shape, or form. This is a conversation so that you understand whether you might have some things you need to look at... Yeah. Or not. Right. And you could be perfectly fine. I think a lot of this spun up too around the COVID years, right? When we stopped going into restaurants and suddenly, to like make up for that,

these POS systems we're like, "here, you can tip at any point." Like, it became so much more automatic I think after 2020. I don't know. That's how I felt going to restaurants like all of a sudden... Well, I think especially as things became the POS system where, you know, they come to your table [00:02:00] with the device and you tap or swipe or whatever you do insert there, and then they just have these buttons that pop up automatically.

I mean, even on my Walmart grocery order, which... yes. If you guys listen to the episode last season, you know, I love grocery delivery, but it automatically populates, you know, your driver gratuity there as well. And so it's just part like every checkout process, it feels like, at this point. Even ones where I'm like, "am I supposed to tip you?

Like, you don't tip your accountant, I don't wanna tip." Yes, and honestly, I think tipping is just becoming bigger now with this like new tip. Deduction on a tax return. Yes. So all of a sudden, people are like, "but can I get tips?" So before we go too much further, if you are not in a typically tipped industry, no, you may not. You don't get the deduction.

I am not charging $1 for tax returns and asking you to tip the rest. It doesn't work that way. So what counts as a tip? Because it's not charging you $1 for your tax return and having you tip the rest. Yes. So [00:03:00] tips are voluntary. A hundred percent. We might feel societal pressure, social pressure, any of those other pressures,

but, if we hit zero, there's nothing legally going to happen to us. We still get the service, the product, whatever it is. It is voluntary. So it has to be decided freely by the person that is paying, which is why we can't say your tax return is $1 and your tip must be $1,900, or, you know, whatever - we cannot do that. So there's no set amount that must be told. Right. And that's where you'll see in the US, the customary 15%, 20%. Like, $15 became the baseline. And that's all social though. There's no policy and law and requirement for that. And the employee has to keep the tip with a few exceptions.

So that's the other piece, right? Like, if you tipped your return, well, that's actually just going into like our revenue line and then getting paid out. It's not coming to me, [00:04:00] Caitlynn, the person who prepared your tax return. So, the employee needs to keep the tip unless you have something set up, like a pool, which we'll discuss.

Yes. And so, like we said, a lot of these point of sale systems have tipping built into them, which is great. However, a point of sale software does not take the place of professional advice. So, highly recommend, especially after talking to our colleague, have an employment attorney review your process for tipping.

If you don't feel like it's super cut-and-dry, like, let's say you are a hairstylist and you're the only person that's using your point of sale system, you don't have other people that work under you, it's literally just you, you get your tips that's cut-and-dry. Like, you don't need some employment attorney to help you.

But if you're doing any of these other methods we talk about today, you have a team [00:05:00] and you're not sure that tips are being doled out correctly, get the policy reviewed. We're gonna talk a little bit More about why that's so important, but the point of sale system doesn't protect you from there being errors there.

And in some ways, since they do have these built-in percentages that show up and sometimes, because of this pressure, you're getting more tips than you like normally would, if it was just cash or something else, you're having a larger monetary threat sit out there, yeah, if you're not handling things correctly.

Oh, without a doubt. And yeah, it's just how... 'cause again, we said, like, the employee has to get the tip, and so, if suddenly your tips are three times, four times what they ever used to be, that needs to be paid out to the employees, then, they'll be happy. But if you as like a business owner, like, "oh, well some of that was like my revenue."

If you own the hair salon, and you're like, "but I actually want to keep 50% of it because I need it to run the hair salon , like to pay the bills," well, now, we're [00:06:00] getting tricky and we need to talk to those employment lawyers about it. But yeah, I mean, I see them everywhere. Panera, to a coffee shop, to the hair salon,

you're just kinda like, "are you really entitled to these tips customarily?" Yeah. . Especially, I think, as we see like minimum wage keeps going up, and we're like, "okay, we know this place, like, people are getting paid a normal wage. Like, this isn't your typical... waitress earns $2 an hour and then is making up the rest in tips, Like, why are we being prompted to tip 20% on top of this?" But then I feel like a jerk if I don't. Right. And I actually am just like, "can I move to Europe where they just price it and then I won't have to tip?" That would be great. Yes. I mean, on the flip side, I don't know where you've been, but, in France, they just ignore you then for like two hours.

So you can never quite get the service you want either, 'cause they're not performing for tips, so it's a coin flip here. So as the employer, what do you have to do? You have to report the tips accurately for tax purposes. Right? So they need to flow through on the paychecks. They need to go onto [00:07:00] the w-2s.

There's actually like a tip... I don't know how closely you've ever looked at your w-2s, but there is a tip box, like tips for social security, tips for Medicare, so they do get separately stated, which is really helpful with the new tip law. You withhold social security and Medicare on those tips, just like you do regular wages.

And you just have to know your local rules and that's where we will continue to default to an employment attorney in your state or familiar with your state, because the state laws could be even more detailed than the federal laws. So the federal is trying to govern 50 states, and then each state gets to kind of choose what they do from there.

Yes, it's very important, and talking to our colleague, he's like, "well, I'm barred in Florida, so, like, if you have clients in other states, they need to talk to someone in that state that knows those state rules very well," 'cause there are state-specific minimum wages... all of that. So, it's important to know those state-specific things.

So then, I'm gonna have Seanna talk to us about pools versus tip credit. So there's like two [00:08:00] ways to do this and since she has the firsthand knowledge from talking to the employment attorney, I'm going to let her kind of take it. But, for you guys' knowledge, there's kind of two "tip-ical" ways to handle tips. And that's "Tip-ical," right? "tip-ical". We can hope, right? And that is pools versus a tip credit, and then it gets a little more complex from there. I was enjoying the pun. "Tip-ical" ways to handle the tips. Okay, so well, we will talk first... Sorry. We'll talk first about the tip credit.

So, like, I think this is the traditional model that we all think of when we're like, "oh wow, a waitress earns $2. It's actually $2.13 is the federal tip minimum wage. and That doesn't change. It's not something that's inflated over time based on cost of living or anything,

they just leave it there. $2.13 per hour is that base amount, and [00:09:00] so, the employer has to pay $2.13 an hour and then the rest, up to minimum wage and beyond can be made up in tips. So the important piece with this is that it only applies to front of house employees. So front of house, from a... like, restaurant standpoint is your waitress, the buser, like, anyone that's going out and dealing with the customers sitting at the tables. The hostess... of those positions.

So, they can be part of that tip credit policy. So their minimum wage can be set at $2.13 an hour, and then they can get their tips. So those tips can either be individual because they have their employee ID, and they worked tables five, seven, and nine, and got X amount in tips. And those tips brought them above minimum wage... and hopefully [00:10:00] beyond,

and so, they're good to go. They just use those tips as the other part of their wage. If they don't make at least minimum wage per hour, then the employer has to contribute enough money outside of the tips to bring them up to minimum wage. So that is the tip credit. Again, only front of house.

Right. Then we have the option for tip pooling. So this is where all the tips earned in a shift, a day, however the restaurant wants to designate that time period, they are pooled together, and then, they are given out to the staff. Okay. So this can be done in many different ways, by percentage, based on what your role is on that shift, whether you're the dishwasher or the chef, or you know, whatever,

you can have percentage policies. However, you are only allowed to give percentages to the [00:11:00] back of house staff: the chefs, the dishwashers... in those positions, if everybody is already paid minimum wage. If you're using the tip pool to make up that percentage on the tip credit basis, so if you have front of house staff being paid $2.13 per hour, you can't use a tip pooling method that includes back of house staff.

So you can't have the back of house people as part of that tip pool in that situation. And I think, that is the part that can be very tricky when you're talking about like the restaurant industry, 'cause you think you can like, "oh, I don't have to set wage at minimum wage 'cause then they get tips,

and the tips definitely bring them over that," there's a lot of rules around how the tip pool can be run and who's allowed to be part of it. And also, managers cannot get any of those tips, owners can't get any of those tips. [00:12:00] So no one that has the ability to like set schedules, or do any of that type of admin-running of the shifts

is allowed... it doesn't matter if they go and wait tables for the day, like, they're still not allowed to get any part of the tips for that. So that is important to keep in mind. Because I know owners of small businesses wear many hats, and you're like, "what? I waited those tables. I don't get any of the tips?"

You do not. I always think back to... I don't know, I watched a lot of Gilmore girls, but like Lorelei would like offer tips to Luke and he is like, "you don't tip the owner," and so that has always stuck with me. But in this new world, where like, I can walk into Panera or like a coffee shop down the street, and everyone there is paid minimum wage, but there's still a tip option.

I guess my assumption is they're running off of a tip pool because of everyone being at that minimum wage. I would assume so, and it's like, what is a tip? Like if you're checking yourself out at Panera, right? Yeah. You just go to one of the kiosks and there's no one ringing you [00:13:00] up. Like, how would they designate an employee ID that gets all of that, you know?

Yeah. So no owners, no managers, and then, everyone at minimum wage. Which is a lift as we start seeing all the minimum wages go up. It makes me wonder... like, how, as a business owner, like how do you manage that? Like do you start turning tips off if everyone's paid minimum wage and like not asking the customers for that, and then as customers, like, I can't imagine.

They're like, what do you mean you are not asking for tips? We're so used to it. It's a weird world. I personally would love it. I feel like restaurant prices are so high, which I'm not arguing with. I know food is expensive, employee time is expensive. Like, if anyone understands the costs that go into creating that food, like, I

do get it. But, if I'm gonna be paying, you know, $18 per plate for a meal, I'd love to not pay 20% on top of that, when [00:14:00] everyone's already making a like normal wage. Yeah. And then other things to review with an employment attorney when you talk to them is like, if you want to implement a mandatory like service charge, so I know I go places and they're like, "Hey, there's an 18% mandatory charge 'cause there's over six people," or whatever the case may be.

So run that through as well with your employment person to make sure like you're following all of the rules of how this works. And if you're requiring it, does it actually count as a tip anymore? Some states probably have different laws than others on that one. Yep. But let's wrap this up with why all of this matters.

Yeah. Because I know that got incredibly technical. I mean, it took a long time for me to wrap my brain around it, and then I was still interpreting things wrong. Like, "oh, well you can do this," no you can't. So why does this matter? Well, a, you want to pay your employees right, yes. You know, you want to keep them happy.

However, on top of that, you want to keep them happy so that they don't have any ability to sue you and cause [00:15:00] problems. And I know we don't like to think about that, just like we don't like to think about audits and everything, but, you know, part of running a business and running your household and keeping yourself safe from a liability standpoint is looking at your risk exposure.

So, if employees find out they're not being tipped correctly, they can go to the Department of Labor in your state, and they will open up a case and they will start looking... They'll come to you and they'll be like, "Hey, we need to review your payroll," and they might keep that contained to the one person that is looking into it, or if they find some discrepancy, they might look, go, "well, you didn't do this right for anybody and now you owe

everybody x amount. And that's a three-year look back period. Oh. kind of like your tax returns, it's open for three years. Yeah. And so, you know, that's if the Department of Labor gets involved, if you have a disgruntled [00:16:00] employee situation, and we never know when that's gonna happen. Right? We can treat our employees as well as we possibly can,

but we're all different people, and we do live in a litigious country, if they get an attorney involved, that's diving into that... it could be worse, right? Like... it could be. And then, I think, the final one is that... you don't want to run your business off of tips. Like, let's get clear on running your business well and making sure you're profitable,

that if those laws change, 'cause it is, it can change at any time, we can decide we're shifting away from a tip industry, a tip culture, we're one of the few countries holding onto it, so if we do shift, can your business still survive? So making sure that it's all being done correctly and you're making business decisions on quality numbers.

Yeah, because even if you think about it, if you take advantage of the tip credit system and you're able to pay your employees $2.13 an hour, that's the only part that's like, the cost to you, and then the rest is being made [00:17:00] up by customers' generosity, that's a lot less cost. Versus if all of a sudden, it's like... nope, all the people that were front of house that were able to be on that, you know, base minimum wage like that, they all have to be minimum wage, and surprise, minimum wage is

$15 an hour. So now, you've got an additional $13 per hour per person in your restaurant. That can be enough to take a business down from a profitability standpoint. Yeah, which is why it's best to do right, to plan for it, to have those discussions with your professionals, both on the accounting and the employment side.

'cause again, we're happy to run those numbers, we're not touching the law. Like, can't pay me enough to even try. But, yeah. So with that, tips are a great way to reward your team, right? If they're handled the right way, if customers are generous, you're delivering amazing product, please have at it.

But just be aware of the POS systems that are making it easy, but also potentially affecting how it's being [00:18:00] doled out. Just 'cause the software is doing it, doesn't make it a hundred percent compliant. If you're not sure if you are handling your tips correctly, if they're reporting correctly, it is time to stop and talk to an employment attorney in your state that can clarify this.

And if you need referrals, recommendations, please let us know, we're happy to point you in the right direction. We want you profitable in succeeding and being legal... and protected... all around. Yeah, exactly. So thank you all for listening with us today, and we will see you next time.