Understanding Cash Tips, Credit Card Tips, and Payroll Tips
Proper handling of employee tips is essential for accurate payroll processing, tax compliance, and clear communication with employees. Tips can be paid and reported in different ways depending on how they are received and processed. This article outlines the key differences between cash tips, credit card tips, and payroll tips, and how each should be handled.
Cash Tips
Cash tips are amounts given directly to employees by customers in cash. These tips are paid immediately to the employee at the time of service and are not processed through payroll.
However, cash tips are still considered taxable income. Employees are responsible for reporting their cash tips to the employer, and employers must ensure these reported amounts are included for tax withholding and reporting purposes. Since the employer does not physically distribute these wages, cash tips will not appear as net pay on a paycheck but should be reflected in reported earnings for tax purposes.
Credit Card Tips
Credit card tips are left by customers when paying via debit or credit card. Unlike cash tips, these funds are collected by the business first and then distributed to employees.
Depending on company policy, credit card tips may be handled in one of two ways:
Paid through payroll: Included in the employee’s paycheck, subject to standard payroll taxes and reporting.
Paid outside of payroll: Distributed directly to employees (e.g., in cash or separate payment). Even in this case, they must still be recorded and included in payroll for tax reporting purposes.
Because the employer controls the distribution, timing and method of payment for credit card tips may vary.
Payroll Tips
“Payroll tips” refers to any tips that are processed and paid through the payroll system. This typically includes credit card tips (when run through Salaris payroll) and any reported cash tips that are incorporated for tax withholding.
When tips are included in payroll:
They are subject to applicable federal, state, and local taxes.
They appear on employee pay statements.
They are included in total wages reported on forms such as the W-2.
Considerations
Timing of Payment: Cash tips are received immediately; credit card tips may be delayed depending on payroll processing.
Tax Reporting: All tips (cash or credit card) must be reported and taxed appropriately, regardless of how they are paid.
Employer Responsibility: Employers must ensure accurate tracking, reporting, and compliance with wage and tax regulations.
Need help?
For definitions of the columns in this report, refer to our Payroll Glossary.
If you have questions or need assistance, please contact Salaris Payroll Support. We’re here to help.