# How do I record tips — cash tips, credit-card tips and tips shared through a pool — and what tip records do I have to keep?

- **[United States (federal tax law administered by the IRS) · employers receiving tips on behalf of employees · federal tax reporting]** Tips are distinguished from service charges as amounts voluntarily paid by customers and for which the customer determines the amount; tips are not amounts paid to the employer and are not included in the employer's gross receipts. → [CG-MCE-063#S09](#s-CG-MCE-063-S09)
- **[United States (US introductory financial accounting textbook; publisher located in Houston, Texas; tax discussion refers to US federal, state and local authorities) · companies that collect taxes on behalf of employees and customers or owe tax obligations of their own]** The textbook defines taxes payable as a liability created when a company collects taxes on behalf of employees and customers, or for the company’s own tax obligations, giving sales taxes and income taxes as examples (“such as”), and states that a future payment to a government agency is required for the amount collected — that is, amounts a company collects on another party’s behalf are carried as a liability rather than as the company’s own resources. → [CG-MCE-063#S10](#s-CG-MCE-063-S10)
- **[United States (federal tax law administered by the IRS) · employees who receive cash tips · federal tax reporting]** The Internal Revenue Code requires an employee to report all cash tips received to their employer in a written statement, unless the total tips received with respect to that employer are less than $20 for the calendar month. → [CG-MCE-063#S36](#s-CG-MCE-063-S36)
- **[United States (federal tax law administered by the IRS) · employers with tipped employees · federal tax reporting]** Employers are required to withhold taxes, including income taxes and the employee's share of Social Security tax and Medicare tax, based on the wages and tip income received by the employee, and must deposit those taxes. → [CG-MCE-063#S42](#s-CG-MCE-063-S42)
- **[United States (federal tax law administered by the IRS) · employers with tipped employees · federal tax reporting]** Employers are required to retain employee tip reports. → [CG-MCE-063#S48](#s-CG-MCE-063-S48)

## What this page establishes

- Tips you collect are held for your staff, not earned by you — Partly established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation, primary regulator or government.)
- Telling a voluntary tip apart from a mandatory service charge — Partly established
- What your employees must report to you, and by when — Partly established
- Withholding, employer tax on tips, and the large-establishment allocation rules — Established
- Who may and may not share in a tip pool — Partly established
- Deducting a card processing fee from a tip — Partly established
- Required tip records and how long to retain them — Partly established
- Recording the settlement: revenue, tax collected and the tip liability — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.)
- How your point-of-sale and payroll system handles card tips — Not established
- Whose money a tip is - and why a service charge is different — Partly established (Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: primary regulator or government.)
- Splitting a card settlement so tips never land in sales — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.)
- Clearing the tip liability: cash at shift end, the pay run, or direct distribution — Partly established (Required authority: authoritative professional or accounting standard, official platform documentation, primary regulator or government. Highest achieved: official platform documentation, primary regulator or government.)
- Cash tips your staff keep - no cash receipt, but still payroll — Established (Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: official platform documentation, primary regulator or government.)
- Recording a tip pool, its allocations and tip-outs — Partly established (Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: official platform documentation, primary regulator or government.)
- What you must do with the tips your employees report — Established
- Can the card processing fee come out of the tip? — Partly established (Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: primary regulator or government.)
- The tip records you must create and keep — Partly established
- Reconciling the tip liability account each period — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government.)

## Whose money a tip is - and why a service charge is different
<a id="need-CG-MCE-063-P1"></a>

- <a id="s-CG-MCE-063-S01"></a>Under section 3(m)(2)(B) of the Act an employer may not keep tips received by its employees for any purpose, and this applies whether or not the employer takes a tip credit. _(jurisdiction: United States (federal); Fair Labor Standards Act as administered by the U.S. Department of Labor Wage and Hour Division, entity_scope: employers and employees covered by the Fair Labor Standards Act (“the Act”))_ `CG-MCE-063#S01`
  > “Section 3(m)(2)(B) of the Act provides that an employer may not keep
tips received by its employees for any
purposes, regardless of whether the employer takes a tip credit.” — [Wage and Hour Division, U.S. Department of Labor; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 29 CFR 531.52 - General restrictions on an employer's use of its employees' tips](https://www.govinfo.gov/content/pkg/CFR-2025-title29-vol3/pdf/CFR-2025-title29-vol3-sec531-52.pdf), 2021-09-24; § 531.52(b), introductory text; printed page 217. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S02"></a>Under Rev. Rul. 59-252 as restated here, the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates the payment may be a service charge: (1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment. The listed factors are indicative, not a conclusive test. _(jurisdiction: United States (federal), entity_scope: payments made in the course of employment, for FICA tax purposes under section 3121, conditions: Rev. Rul. 2012-18, published in Internal Revenue Bulletin 2012-26 (June 25, 2012); Rev. Rul. 95-7 modified and superseded)_ `CG-MCE-063#S02`
  > “The revenue ruling provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: (1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment.” — [Internal Revenue Service, U.S. Department of the Treasury — Internal Revenue Bulletin 2012-26, containing Rev. Rul. 2012-18 (Section 3121 — Tips Included for Both Employee and Employer Taxes)](https://www.irs.gov/irb/2012-26_IRB), 2012-06-25; Part I, Rev. Rul. 2012-18, QUESTIONS AND ANSWERS — IN GENERAL, Q&A 1. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S03"></a>Service charges are amounts required by an establishment as part of a customer's bill, such as automatic charges for large parties or other mandatory fees, and are income to the employer whether or not the employer distributes all or part of them to employees. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: establishments imposing service charges, accounting_basis: federal tax reporting)_ `CG-MCE-063#S03`
  > “Service charges are amounts required by an establishment as part of a customer’s bill, such as automatic charges for large parties or other mandatory fees. These amounts are income to the employer regardless of whether the employer distributes all or a portion of the service charges to employees.” — [Internal Revenue Service, U.S. Department of the Treasury — Tip recordkeeping and reporting](https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting), 2026-07-31; Section "Service charges retained by employer are income to the employer" (TEXT.txt line 326). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S05"></a>The law states that gratuities are the sole property of the employee or employees to whom they are given. _(jurisdiction: California, United States (California Labor Code as enforced by the Labor Commissioner's Office / DLSE), entity_scope: Gratuities given to employees covered by the California Labor Code)_ `CG-MCE-063#S05`
  > “The law further states that gratuities are the sole property of the employee or employees to whom they are given.” — [Labor Commissioner's Office (Division of Labor Standards Enforcement), California Department of Industrial Relations — Tips and Gratuities - Frequently Asked Questions](https://www.dir.ca.gov/dlse/faq_tipsandgratuities.htm), March 2013 (only dated marker on the page: "(updated March 2013)" on the answer to Q&A 4); Tips and gratuities — introductory paragraph, above Q&A 1. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Partly established. Established: that a tip belongs to the employee (S05); separation of that from a mandatory service charge the business imposes (S02, S03, S09); that a mandatory service charge is the business's own revenue (S03). Missing: that a tip is therefore held by the business rather than earned by it; that a mandatory service charge reaches the employee through a different route._

_Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: primary regulator or government._

## Telling a voluntary tip apart from a mandatory service charge
<a id="need-CG-MCE-063-C2"></a>

- See above: Under section 3(m)(2)(B) of the Act an employer may not keep tips received by its employees for any purpose, and this applies whether or not the employer takes a tip credit. ([CG-MCE-063#S01](#s-CG-MCE-063-S01))

- See above: Under Rev. Rul. 59-252 as restated here, the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates the payment may be a service charge: (1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment. The listed factors are indicative, not a conclusive test. ([CG-MCE-063#S02](#s-CG-MCE-063-S02))

- See above: Service charges are amounts required by an establishment as part of a customer's bill, such as automatic charges for large parties or other mandatory fees, and are income to the employer whether or not the employer distributes all or part of them to employees. ([CG-MCE-063#S03](#s-CG-MCE-063-S03))

- See above: The law states that gratuities are the sole property of the employee or employees to whom they are given. ([CG-MCE-063#S05](#s-CG-MCE-063-S05))

- <a id="s-CG-MCE-063-S06"></a>An employer’s characterization of a payment as a “tip” is not determinative for FICA tax purposes; an employer may characterize a payment as a tip when the payment is in fact a service charge. _(jurisdiction: United States (federal), entity_scope: employers and employees, for FICA tax purposes under section 3121, conditions: Rev. Rul. 2012-18, published in Internal Revenue Bulletin 2012-26 (June 25, 2012); Rev. Rul. 95-7 modified and superseded)_ `CG-MCE-063#S06`
  > “No. The employer’s characterization of a payment as a “tip” is not determinative. For example, an employer may characterize a payment as a tip, when in fact the payment is a service charge.” — [Internal Revenue Service, U.S. Department of the Treasury — Internal Revenue Bulletin 2012-26, containing Rev. Rul. 2012-18 (Section 3121 — Tips Included for Both Employee and Employer Taxes)](https://www.irs.gov/irb/2012-26_IRB), 2012-06-25; Part I, Rev. Rul. 2012-18, QUESTIONS AND ANSWERS — IN GENERAL, Q&A 1. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S07"></a>A service charge may or may not be considered a "gratuity" (tip) under Labor Code section 350, depending on whether the specific facts show the charge is perceived and intended by a customer to be a gratuity. _(jurisdiction: California, United States (California Labor Code as enforced by the Labor Commissioner's Office / DLSE), entity_scope: Service charges imposed by businesses subject to the California Labor Code, conditions: turns on the specific facts of whether the customer perceives and intends the charge to be a gratuity)_ `CG-MCE-063#S07`
  > ““Service charges” may be considered a “gratuity” (tip) under Labor Code section 350 or not depending upon whether the specific facts show the charge is perceived and intended by a customer to be a gratuity.” — [Labor Commissioner's Office (Division of Labor Standards Enforcement), California Department of Industrial Relations — Tips and Gratuities - Frequently Asked Questions](https://www.dir.ca.gov/dlse/faq_tipsandgratuities.htm), March 2013 (only dated marker on the page: "(updated March 2013)" on the answer to Q&A 4); Tips and gratuities — Q&A 6 ("Is a mandatory service charge considered to be the same as a tip or gratuity?"). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Partly established. Established: the criteria that distinguish a voluntary tip from a mandatory service charge or automatic gratuity (S02, S07); whose property a tip is once the employer has collected it and until it is paid over to the employee (S05). Missing: the different revenue and payroll treatment each receives._

## Tips you collect are held for your staff, not earned by you
<a id="need-CG-MCE-063-C1"></a>

- See above: Under section 3(m)(2)(B) of the Act an employer may not keep tips received by its employees for any purpose, and this applies whether or not the employer takes a tip credit. ([CG-MCE-063#S01](#s-CG-MCE-063-S01))

- <a id="s-CG-MCE-063-S08"></a>Only tips actually received by an employee as money belonging to that employee may be counted when determining whether the person is a “tipped employee” under the Act and when applying the section 3(m)(2)(A) provisions governing wage credits for tips; the regulation thus characterises countable tips as money belonging to the employee. _(jurisdiction: United States (federal); Fair Labor Standards Act as administered by the U.S. Department of Labor Wage and Hour Division, entity_scope: employers and employees covered by the Fair Labor Standards Act (“the Act”))_ `CG-MCE-063#S08`
  > “Only tips actually received by an employee as
money belonging to the employee may
be counted in determining whether the
person is a ‘‘tipped employee’’ within
the meaning of the Act and in applying
the provisions of section 3(m)(2)(A)
which govern wage credits for tips.” — [Wage and Hour Division, U.S. Department of Labor; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 29 CFR 531.52 - General restrictions on an employer's use of its employees' tips](https://www.govinfo.gov/content/pkg/CFR-2025-title29-vol3/pdf/CFR-2025-title29-vol3-sec531-52.pdf), 2021-09-24; § 531.52(a), final sentence; printed page 217. Verified 2026-09-09.

- <a id="s-CG-MCE-063-S09"></a>Tips are distinguished from service charges as amounts voluntarily paid by customers and for which the customer determines the amount; tips are not amounts paid to the employer and are not included in the employer's gross receipts. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: employers receiving tips on behalf of employees, accounting_basis: federal tax reporting)_ `CG-MCE-063#S09`
  > “This is distinguished from "tips," which are amounts voluntarily paid by customers and for which the customer determines the amount. Tips are not amounts paid to the employer and are not included in the employer’s gross receipts.” — [Internal Revenue Service, U.S. Department of the Treasury — Tip recordkeeping and reporting](https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting), 2026-07-31; Section "Service charges retained by employer are income to the employer" (TEXT.txt line 326). Verified 2026-09-09.

- <a id="s-CG-MCE-063-S10"></a>The textbook defines taxes payable as a liability created when a company collects taxes on behalf of employees and customers, or for the company’s own tax obligations, giving sales taxes and income taxes as examples (“such as”), and states that a future payment to a government agency is required for the amount collected — that is, amounts a company collects on another party’s behalf are carried as a liability rather than as the company’s own resources. _(jurisdiction: United States (US introductory financial accounting textbook; publisher located in Houston, Texas; tax discussion refers to US federal, state and local authorities), entity_scope: companies that collect taxes on behalf of employees and customers or owe tax obligations of their own, conditions: examples given as “such as sales taxes or income taxes”, not a closed list)_ `CG-MCE-063#S10`
  > “Taxes payable refers to a liability created when a company collects taxes on behalf of employees and customers or for tax obligations owed by the company, such as sales taxes or income taxes. A future payment to a government agency is required for the amount collected.” — [OpenStax, Rice University — Principles of Accounting, Volume 1: Financial Accounting - 12.1 Identify and Describe Current Liabilities](https://openstax.org/books/principles-financial-accounting/pages/12-1-identify-and-describe-current-liabilities), 2019-04-11; Section 12.1 → “Taxes Payable”, first paragraph. Verified 2026-09-09.

_Partly established. Established: whether tips collected by an employer on an employee's behalf are the employee's property held by the employer rather than employer revenue (S05); how tips an employee receives and keeps directly are treated where the business receives no cash at all (S17). Missing: the accounting treatment that follows from that characterisation; how tips that are pooled, allocated among participants and passed on to other roles are carried and cleared in the accounts._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation, primary regulator or government._

## Splitting a card settlement so tips never land in sales
<a id="need-CG-MCE-063-P2"></a>

- See above: Tips are distinguished from service charges as amounts voluntarily paid by customers and for which the customer determines the amount; tips are not amounts paid to the employer and are not included in the employer's gross receipts. ([CG-MCE-063#S09](#s-CG-MCE-063-S09))

- See above: The textbook defines taxes payable as a liability created when a company collects taxes on behalf of employees and customers, or for the company’s own tax obligations, giving sales taxes and income taxes as examples (“such as”), and states that a future payment to a government agency is required for the amount collected — that is, amounts a company collects on another party’s behalf are carried as a liability rather than as the company’s own resources. ([CG-MCE-063#S10](#s-CG-MCE-063-S10))

- <a id="s-CG-MCE-063-S12"></a>In the textbook’s illustrative example, a shoe store selling a $50 pair of shoes with 8% sales tax collects $54 in total from the customer, of which the $4 sales tax portion is a current liability until it is distributed to the government authority — i.e. the example shows the total amount collected being split between the sale amount and the tax amount held as a liability. This is an illustration, not a stated rule. _(jurisdiction: United States (US introductory financial accounting textbook; publisher located in Houston, Texas; tax discussion refers to US federal, state and local authorities), entity_scope: illustrative retail seller collecting sales tax from a customer, conditions: stated as a worked example (“For example, assume…”) with assumed figures)_ `CG-MCE-063#S12`
  > “For example, assume that each time a shoe store sells a $50 pair of shoes, it will charge the customer a sales tax of 8% of the sales price. The shoe store collects a total of $54 from the customer. The $4 sales tax is a current liability until distributed within the company’s operating period to the government authority collecting sales tax.” — [OpenStax, Rice University — Principles of Accounting, Volume 1: Financial Accounting - 12.1 Identify and Describe Current Liabilities](https://openstax.org/books/principles-financial-accounting/pages/12-1-identify-and-describe-current-liabilities), 2019-04-11; Section 12.1 → “Taxes Payable”, third paragraph (worked example following Figure 12.5). Verified 2026-09-09.

_Not established from an authoritative source._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government._

## Recording the settlement: revenue, tax collected and the tip liability
<a id="need-CG-MCE-063-C8"></a>

- See above: Tips are distinguished from service charges as amounts voluntarily paid by customers and for which the customer determines the amount; tips are not amounts paid to the employer and are not included in the employer's gross receipts. ([CG-MCE-063#S09](#s-CG-MCE-063-S09))

- See above: The textbook defines taxes payable as a liability created when a company collects taxes on behalf of employees and customers, or for the company’s own tax obligations, giving sales taxes and income taxes as examples (“such as”), and states that a future payment to a government agency is required for the amount collected — that is, amounts a company collects on another party’s behalf are carried as a liability rather than as the company’s own resources. ([CG-MCE-063#S10](#s-CG-MCE-063-S10))

- See above: In the textbook’s illustrative example, a shoe store selling a $50 pair of shoes with 8% sales tax collects $54 in total from the customer, of which the $4 sales tax portion is a current liability until it is distributed to the government authority — i.e. the example shows the total amount collected being split between the sale amount and the tax amount held as a liability. This is an illustration, not a stated rule. ([CG-MCE-063#S12](#s-CG-MCE-063-S12))

- <a id="s-CG-MCE-063-S14"></a>The textbook states that liabilities require a future disbursement of assets or services arising from a prior business activity or transaction. _(jurisdiction: United States (US introductory financial accounting textbook; publisher located in Houston, Texas; tax discussion refers to US federal, state and local authorities), entity_scope: companies generally, as presented in an introductory financial accounting textbook)_ `CG-MCE-063#S14`
  > “As you’ve learned, liabilities require a future disbursement of assets or services resulting from a prior business activity or transaction.” — [OpenStax, Rice University — Principles of Accounting, Volume 1: Financial Accounting - 12.1 Identify and Describe Current Liabilities](https://openstax.org/books/principles-financial-accounting/pages/12-1-identify-and-describe-current-liabilities), 2019-04-11; Section 12.1 Identify and Describe Current Liabilities — opening paragraph (before the heading “Fundamentals of Current Liabilities”). Verified 2026-09-09.

- <a id="s-CG-MCE-063-S15"></a>Businesses subject to sales taxation hold the sales tax collected in a Sales Tax Payable account until payment is due to the governing body. _(jurisdiction: United States (US introductory financial accounting textbook; publisher located in Houston, Texas; tax discussion refers to US federal, state and local authorities), entity_scope: businesses subject to sales taxation)_ `CG-MCE-063#S15`
  > “Those businesses subject to sales taxation hold the sales tax in the Sales Tax Payable account until payment is due to the governing body.” — [OpenStax, Rice University — Principles of Accounting, Volume 1: Financial Accounting - 12.1 Identify and Describe Current Liabilities](https://openstax.org/books/principles-financial-accounting/pages/12-1-identify-and-describe-current-liabilities), 2019-04-11; Section 12.1 → “Taxes Payable”, second paragraph. Verified 2026-09-09.

- <a id="s-CG-MCE-063-S16"></a>The tips deduction item is pointed at the same account that was used in the Expense account field of the tips Addition item, so the addition and the deduction post to one and the same account. _(jurisdiction: United States, entity_scope: QuickBooks Desktop Payroll users creating the tips deduction item, platform: QuickBooks Desktop Payroll, platform_edition: QuickBooks Desktop Payroll Assisted, Basic, Enhanced (US edition))_ `CG-MCE-063#S16`
  > “In the Liability Account ▼ dropdown, select the same account you had in the Expense account field for Addition item (tips in).” — [Intuit Inc. — Pay and report tips](https://quickbooks.intuit.com/learn-support/en-us/help-article/payroll-additions-deductions/tips-paychecks/L6tQn28f8_US_en_US), 2026-08-05; Step 2: Set up a payroll item for tips in QuickBooks › QuickBooks Desktop Payroll › Step 2: Create a payroll deduction item for tips kept by the employee, step 5. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Not established from an authoritative source._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government._

## Clearing the tip liability: cash at shift end, the pay run, or direct distribution
<a id="need-CG-MCE-063-P3"></a>

- See above: The tips deduction item is pointed at the same account that was used in the Expense account field of the tips Addition item, so the addition and the deduction post to one and the same account. ([CG-MCE-063#S16](#s-CG-MCE-063-S16))

- <a id="s-CG-MCE-063-S17"></a>Where the employee receives the tips in cash, the deduction item must also be entered in the Other Payroll Items section of the paycheck, to take the amount back out so the employee is not paid for the cash tips again. _(jurisdiction: United States, entity_scope: Employers whose employees receive tips in cash, platform: QuickBooks Desktop Payroll, platform_edition: QuickBooks Desktop Payroll Assisted, Basic, Enhanced (US edition), conditions: employee receives the tips in cash)_ `CG-MCE-063#S17`
  > “If the employee receives the tips in cash, you need to enter the deduction item in the Other Payroll Items section. This is to take the amount out so they don’t get paid for the cash tips again.” — [Intuit Inc. — Pay and report tips](https://quickbooks.intuit.com/learn-support/en-us/help-article/payroll-additions-deductions/tips-paychecks/L6tQn28f8_US_en_US), 2026-08-05; Step 3: Report tips on paychecks and payroll forms › QuickBooks Desktop Payroll. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S18"></a>An employer can pay paycheck or credit card tips to employees through their paychecks along with regular pay; this is presented as an option, not the only route. _(jurisdiction: United States, entity_scope: Employers with tipped employees, conditions: tips received by credit/debit card, gift card or other electronic payment)_ `CG-MCE-063#S18`
  > “You can give these tips to your employees through their paychecks along with their regular pay.” — [Intuit Inc. — Pay and report tips](https://quickbooks.intuit.com/learn-support/en-us/help-article/payroll-additions-deductions/tips-paychecks/L6tQn28f8_US_en_US), 2026-08-05; Step 1: Determine what type of tips your employees received › Paycheck tips or Credit Card tips. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S19"></a>Under § 531.54(b)(2), an employer that facilitates tip pooling by collecting and redistributing employees’ tips does not violate the section 3(m)(2)(B) prohibition against keeping tips if it fully distributes any tips it collects no later than the regular payday for the workweek in which the tips were collected, or, where the pay period covers more than a single workweek, the regular payday for the period in which that workweek ends. _(jurisdiction: United States (federal), entity_scope: Employers of employees who receive tips, under the Fair Labor Standards Act, conditions: employer facilitates tip pooling by collecting and redistributing employees’ tips)_ `CG-MCE-063#S19`
  > “employees’ tips does not violate section 3(m)(2)(B)’s prohibition against keeping tips if it fully distributes any tips the employer collects no later than the regular payday for the workweek in which the tips were collected, or when the pay period covers more than a single workweek, the regular payday for the period in which the workweek ends.” — [Wage and Hour Division, U.S. Department of Labor; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 29 CFR 531.54 — Tip pooling (with §§ 531.52, 531.53, 531.55 and the start of 531.56 on the same pinned pages)](https://www.govinfo.gov/content/pkg/CFR-2025-title29-vol3/pdf/CFR-2025-title29-vol3-sec531-54.pdf), 2021-09-24; § 531.54(b)(2) “Full and prompt distribution of tips” — sentence begins at the foot of printed page 217 (“An employer that facilitates tip pooling by collecting and redistributing…”) and continues at the top of printed page 218; quoted portion is the page-218 continuation. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Partly established. Established: payment through the pay run as a route by which the tip liability is cleared (S18). Missing: cash paid at shift end as a route by which the tip liability is cleared; distribution directly to the employee by the point-of-sale or a tip application as a route by which the tip liability is cleared; what each route does to the liability balance; what each route still owes to payroll._

_Required authority: authoritative professional or accounting standard, official platform documentation, primary regulator or government. Highest achieved: official platform documentation, primary regulator or government._

## How your point-of-sale and payroll system handles card tips
<a id="need-CG-MCE-063-C9"></a>

- See above: An employer can pay paycheck or credit card tips to employees through their paychecks along with regular pay; this is presented as an option, not the only route. ([CG-MCE-063#S18](#s-CG-MCE-063-S18))

- <a id="s-CG-MCE-063-S20"></a>In Intuit QuickBooks Workforce, tips are reported by entering a tip amount while running the scheduled payroll. _(jurisdiction: United States, entity_scope: Employers reporting employee tips on paychecks, platform: Intuit QuickBooks Workforce (QuickBooks Online Payroll), platform_edition: QuickBooks Online Payroll Core, Premium, Elite; QuickBooks Desktop Payroll Assisted, Basic, Enhanced (US edition, article updated 8/5/2026))_ `CG-MCE-063#S20`
  > “As you run your scheduled payroll , enter an amount for tips.” — [Intuit Inc. — Pay and report tips](https://quickbooks.intuit.com/learn-support/en-us/help-article/payroll-additions-deductions/tips-paychecks/L6tQn28f8_US_en_US), 2026-08-05; Step 3: Report tips on paychecks and payroll forms › Intuit QuickBooks Workforce. Verified 2026-09-09.

- <a id="s-CG-MCE-063-S21"></a>Tips that are paid by credit card and then converted to cash are also treated as cash tips for this purpose. _(jurisdiction: United States, entity_scope: Employers with tipped employees, conditions: tip paid by credit card and then converted to cash)_ `CG-MCE-063#S21`
  > “Tips paid by credit card and then converted to cash are also considered cash tips.” — [Intuit Inc. — Pay and report tips](https://quickbooks.intuit.com/learn-support/en-us/help-article/payroll-additions-deductions/tips-paychecks/L6tQn28f8_US_en_US), 2026-08-05; Step 1: Determine what type of tips your employees received › Cash tips. Verified 2026-09-09.

- <a id="s-CG-MCE-063-S22"></a>By default, all of a seller's locations are set to tip team members directly, under which each team member keeps 100% of the tips they collect. _(jurisdiction: United States, entity_scope: All Square locations of a seller, before tip pooling is turned on, platform: Square, platform_edition: Square Support Center, United States (English), conditions: default setting, i.e. tip pooling not turned on)_ `CG-MCE-063#S22`
  > “By default all locations are set to tip team members directly, where each team member keeps 100% of the tips they collect.” — [Block, Inc. (Square Support Center, United States) — Set up tip pooling](https://squareup.com/help/us/en/article/7654-get-started-with-tip-pooling-for-team-management), Square Support Center, United States (English) edition; Home > Staff and payroll; footer '© 2026 Block, Inc.'; article states it is for Square Shifts Plus, Square for Retail Premium, Square for Restaurants Premium, Square Appointments Premium, Square Plus and Square Premium subscribers; Set your tip pooling. Verified 2026-09-09.

- <a id="s-CG-MCE-063-S23"></a>When creating a tip pool in Square Dashboard, the seller chooses how often tips are tallied up; the options the article lists are per transaction, daily and weekly. _(jurisdiction: United States, entity_scope: Square sellers creating a tip pool in Square Dashboard, platform: Square, platform_edition: Square Support Center, United States (English), conditions: during tip pool creation in Square Dashboard)_ `CG-MCE-063#S23`
  > “Choose how often are tips tallied up:
 Per transaction 
 Daily 
 Weekly” — [Block, Inc. (Square Support Center, United States) — Set up tip pooling](https://squareup.com/help/us/en/article/7654-get-started-with-tip-pooling-for-team-management), Square Support Center, United States (English) edition; Home > Staff and payroll; footer '© 2026 Block, Inc.'; article states it is for Square Shifts Plus, Square for Retail Premium, Square for Restaurants Premium, Square Appointments Premium, Square Plus and Square Premium subscribers; Set your tip pooling — step following 'Click Team pools tips > Create tip pool'. Verified 2026-09-09.

- <a id="s-CG-MCE-063-S24"></a>Square's tip pooling feature can be used to divide each credit card tip equally across all tip-eligible team members who were clocked in at the time of the transaction. _(jurisdiction: United States, entity_scope: Square sellers with tip-eligible team members who clock in, platform: Square, platform_edition: Square Support Center, United States (English), conditions: tip pooling is used; team members are tip-eligible and clocked in at the time of the transaction)_ `CG-MCE-063#S24`
  > “You can use tip pooling to equally divide each credit card tip across all tip-eligible team members clocked in at the time of the transaction.” — [Block, Inc. (Square Support Center, United States) — Set up tip pooling](https://squareup.com/help/us/en/article/7654-get-started-with-tip-pooling-for-team-management), Square Support Center, United States (English) edition; Home > Staff and payroll; footer '© 2026 Block, Inc.'; article states it is for Square Shifts Plus, Square for Retail Premium, Square for Restaurants Premium, Square Appointments Premium, Square Plus and Square Premium subscribers; About tip pooling. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Not established from an authoritative source._

## Cash tips your staff keep - no cash receipt, but still payroll
<a id="need-CG-MCE-063-P4"></a>

- See above: Where the employee receives the tips in cash, the deduction item must also be entered in the Other Payroll Items section of the paycheck, to take the amount back out so the employee is not paid for the cash tips again. ([CG-MCE-063#S17](#s-CG-MCE-063-S17))

- <a id="s-CG-MCE-063-S25"></a>The publication is addressed to employees who receive tips; all tips an employee receives are income subject to federal income tax, and the employee must include in gross income tips received directly, charged tips paid to the employee by the employer, and the employee's share of tips received under a tip-splitting or tip-pooling arrangement. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: Employees who receive tips (the publication states it is for employees who receive tips))_ `CG-MCE-063#S25`
  > “This publication is for employees who receive tips. All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.” — [Internal Revenue Service, U.S. Department of the Treasury — Publication 531, Reporting Tip Income](https://www.irs.gov/publications/p531), 2026-04-30; Publication 531 - Introductory Material, Introduction. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S26"></a>All cash tips an employee receives are wages for FICA tax purposes and must therefore be reported to the employer, unless the cash tips received while working for that employer during a single calendar month total less than $20. _(jurisdiction: United States (federal), entity_scope: employees receiving cash tips, for FICA tax purposes, conditions: Rev. Rul. 2012-18, published in Internal Revenue Bulletin 2012-26 (June 25, 2012); Rev. Rul. 95-7 modified and superseded)_ `CG-MCE-063#S26`
  > “All cash tips received by an employee are wages for FICA tax purposes and, therefore, must be reported to the employer unless the cash tips received by the employee during a single calendar month while working for the employer total less than $20.” — [Internal Revenue Service, U.S. Department of the Treasury — Internal Revenue Bulletin 2012-26, containing Rev. Rul. 2012-18 (Section 3121 — Tips Included for Both Employee and Employer Taxes)](https://www.irs.gov/irb/2012-26_IRB), 2012-06-25; Part I, Rev. Rul. 2012-18, QUESTIONS AND ANSWERS — IN GENERAL, Q&A 2. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: official platform documentation, primary regulator or government._

## Recording a tip pool, its allocations and tip-outs
<a id="need-CG-MCE-063-P5"></a>

- See above: Square's tip pooling feature can be used to divide each credit card tip equally across all tip-eligible team members who were clocked in at the time of the transaction. ([CG-MCE-063#S24](#s-CG-MCE-063-S24))

- <a id="s-CG-MCE-063-S27"></a>For each work day the daily record must show the amount of cash tips and charge tips received directly from customers or from other employees, and the amount of tips, if any, paid out to other employees through tip sharing, tip pooling or other arrangements, together with the names of those employees. _(jurisdiction: United States (federal); Internal Revenue Code and Treasury regulations administered by the Internal Revenue Service, entity_scope: employees who receive tip income (tipped employees), effective_from: 1985-10-01, conditions: per work day; names required only for employees to whom tips are paid out)_ `CG-MCE-063#S27`
  > “The daily record
shall show for each work day the
amount of cash tips and charge tips received directly from customers or from
other employees, and the amount of
tips, if any, paid out to other employees through tip sharing, tip pooling or
other arrangements and the names of
such employees.” — [Internal Revenue Service, Department of the Treasury; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 26 CFR 31.6053-4 - Substantiation requirements for tipped employees](https://www.govinfo.gov/content/pkg/CFR-2025-title26-vol17/pdf/CFR-2025-title26-vol17-sec31-6053-4.pdf), 2025-04-01; § 31.6053–4 Substantiation requirements for tipped employees, paragraph (a)(2) “Daily record”, page 379. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S28"></a>Where employees practice tip splitting — the example given is waiters giving a portion of their tips to the busser — both the amounts retained by the waiters and the amounts given to the bussers are considered tips of the individuals who retain them, when applying sections 3(m)(2)(A) and 3(t). _(jurisdiction: United States (federal), entity_scope: Employers of employees who receive tips, under the Fair Labor Standards Act, conditions: employees practice tip splitting)_ `CG-MCE-063#S28`
  > “Where employees practice tip splitting, as where waiters give a portion of their tips to the busser, both the amounts retained by the waiters and those given the bussers are considered tips of the individuals who retain them, in applying the provisions of sections 3(m)(2)(A) and 3(t).” — [Wage and Hour Division, U.S. Department of Labor; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 29 CFR 531.54 — Tip pooling (with §§ 531.52, 531.53, 531.55 and the start of 531.56 on the same pinned pages)](https://www.govinfo.gov/content/pkg/CFR-2025-title29-vol3/pdf/CFR-2025-title29-vol3-sec531-54.pdf), 2021-09-24; § 531.54(a) “Monies counted as tips”, printed page 217. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S29"></a>Where an accounting of tips is made to an employer for the employer’s information only, or in furtherance of a pooling arrangement under which the employer redistributes the tips to the employees on some basis the employees have mutually agreed among themselves, the amounts each individual receives and retains as his or her own are counted as that individual’s tips for purposes of the Act. _(jurisdiction: United States (federal), entity_scope: Employers of employees who receive tips, under the Fair Labor Standards Act, conditions: an accounting is made to the employer for information only or in furtherance of a pooling arrangement; redistribution is on a basis the employees have mutually agreed among themselves)_ `CG-MCE-063#S29`
  > “Similarly, where an accounting is made to an employer for his or her information only or in furtherance of a pooling arrangement whereby the employer redistributes the tips to the employees upon some basis to which they have mutually agreed among themselves, the amounts received and retained by each individual as his or her own are counted as his or her tips for purposes of the Act.” — [Wage and Hour Division, U.S. Department of Labor; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 29 CFR 531.54 — Tip pooling (with §§ 531.52, 531.53, 531.55 and the start of 531.56 on the same pinned pages)](https://www.govinfo.gov/content/pkg/CFR-2025-title29-vol3/pdf/CFR-2025-title29-vol3-sec531-54.pdf), 2021-09-24; § 531.54(a) “Monies counted as tips”, printed page 217. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S30"></a>Where an employer takes a section 3(m)(2)(A) tip credit, it may require an employee for whom it takes the tip credit to contribute tips to a tip pool only if that pool is limited to employees who customarily and regularly receive tips. _(jurisdiction: United States (federal), entity_scope: Employers that take a section 3(m)(2)(A) tip credit, conditions: employer takes a tip credit pursuant to section 3(m)(2)(A))_ `CG-MCE-063#S30`
  > “When an employer takes a tip credit pursuant to section 3(m)(2)(A): (1) The employer may require an employee for whom the employer takes a tip credit to contribute tips to a tip pool only if it is limited to employees who customarily and regularly receive tips;” — [Wage and Hour Division, U.S. Department of Labor; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 29 CFR 531.54 — Tip pooling (with §§ 531.52, 531.53, 531.55 and the start of 531.56 on the same pinned pages)](https://www.govinfo.gov/content/pkg/CFR-2025-title29-vol3/pdf/CFR-2025-title29-vol3-sec531-54.pdf), 2021-09-24; § 531.54(c) “Employers that take a section 3(m)(2)(A) tip credit”, paragraph (c)(1), printed page 218. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Partly established. Established: the allocation among participants (S24); tip-outs to other roles (S27); the record that evidences the allocation (S27); the constraint on who may share in a pool (S32, S35). Missing: the amounts entering the pool._

_Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: official platform documentation, primary regulator or government._

## Who may and may not share in a tip pool
<a id="need-CG-MCE-063-C5"></a>

- See above: Where an employer takes a section 3(m)(2)(A) tip credit, it may require an employee for whom it takes the tip credit to contribute tips to a tip pool only if that pool is limited to employees who customarily and regularly receive tips. ([CG-MCE-063#S30](#s-CG-MCE-063-S30))

- <a id="s-CG-MCE-063-S32"></a>Section 3(m)(2)(B) expressly prohibits an employer from requiring employees to share tips with managers or supervisors (as defined in § 531.52(b)(2)) or with employers (as defined in 29 U.S.C. 203(d)). _(jurisdiction: United States (federal), entity_scope: Employers of employees who receive tips, under the Fair Labor Standards Act)_ `CG-MCE-063#S32`
  > “Section 3(m)(2)(B) expressly prohibits employers from requiring employees to share tips with managers or supervisors, as defined in § 531.52(b)(2), or employers, as defined in 29 U.S.C. 203(d).” — [Wage and Hour Division, U.S. Department of Labor; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 29 CFR 531.54 — Tip pooling (with §§ 531.52, 531.53, 531.55 and the start of 531.56 on the same pinned pages)](https://www.govinfo.gov/content/pkg/CFR-2025-title29-vol3/pdf/CFR-2025-title29-vol3-sec531-54.pdf), 2021-09-24; § 531.54(b)(1) “Meaning of ‘keep’”, printed page 217. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S33"></a>An employer may not allow managers and supervisors to keep any portion of an employee’s tips, whether or not the employer takes a tip credit; a manager or supervisor may, however, keep tips he or she receives directly from customers for service that he or she directly and solely provides. _(jurisdiction: United States (federal), entity_scope: Employers of employees who receive tips, under the Fair Labor Standards Act)_ `CG-MCE-063#S33`
  > “An employer may not allow managers and supervisors to keep any portion of an employee’s tips, regardless of whether the employer takes a tip credit. A manager or supervisor may keep tips that he or she receives directly from customers based on the service that he or she directly and solely provides.” — [Wage and Hour Division, U.S. Department of Labor; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 29 CFR 531.54 — Tip pooling (with §§ 531.52, 531.53, 531.55 and the start of 531.56 on the same pinned pages)](https://www.govinfo.gov/content/pkg/CFR-2025-title29-vol3/pdf/CFR-2025-title29-vol3-sec531-54.pdf), 2021-09-24; § 531.52(b)(2), printed page 217. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S35"></a>The courts have validated tip pooling policies that distributed tips among employees who provide "direct table service" or who are in the "chain of service", provided the employee in the chain of service bears a relationship to the customers' overall experience. _(jurisdiction: California, United States (California Labor Code as enforced by the Labor Commissioner's Office / DLSE), entity_scope: Tip pooling policies considered by California courts under Labor Code section 351; answer given in the context of a restaurant, conditions: employee in the chain of service bears a relationship to the customers' overall experience)_ `CG-MCE-063#S35`
  > “In this regard, the courts have validated policies that distributed tips among employees who provide "direct table service" or who are in the "chain of service" provided that employee in the chain of service bears a relationship to the customers' overall experience.” — [Labor Commissioner's Office (Division of Labor Standards Enforcement), California Department of Industrial Relations — Tips and Gratuities - Frequently Asked Questions](https://www.dir.ca.gov/dlse/faq_tipsandgratuities.htm), March 2013 (only dated marker on the page: "(updated March 2013)" on the answer to Q&A 4); Tips and gratuities — Q&A 4 (tip pooling), final sentence; answer marked "(updated March 2013)". Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Partly established. Established: which roles may participate in tip pooling and sharing arrangements (S35); whose participation is restricted (S32). Missing: what the employer may and may not require._

## What your employees must report to you, and by when
<a id="need-CG-MCE-063-C3"></a>

- See above: For each work day the daily record must show the amount of cash tips and charge tips received directly from customers or from other employees, and the amount of tips, if any, paid out to other employees through tip sharing, tip pooling or other arrangements, together with the names of those employees. ([CG-MCE-063#S27](#s-CG-MCE-063-S27))

- <a id="s-CG-MCE-063-S36"></a>The Internal Revenue Code requires an employee to report all cash tips received to their employer in a written statement, unless the total tips received with respect to that employer are less than $20 for the calendar month. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: employees who receive cash tips, accounting_basis: federal tax reporting, conditions: threshold: no reporting required where tips with respect to that employer total less than $20 for the calendar month)_ `CG-MCE-063#S36`
  > “The Internal Revenue Code requires employees to report all cash tips received to their employer in a written statement, unless the total amount of tips received with respect to that employer are less than $20 for the calendar month.” — [Internal Revenue Service, U.S. Department of the Treasury — Tip recordkeeping and reporting](https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting), 2026-07-31; Section "Report cash tips to the employer, unless the total is less than $20 per month with respect to that employer" (TEXT.txt line 269). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S37"></a>No particular IRS form must be used for the employee's tip statement, but the statement must include the employee's signature; the employee's name, address and Social Security number; the employer's name and address, including the establishment name if different; the month or period covered by the report; and the total cash tips received during the month or period. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: employees reporting cash tips to an employer, accounting_basis: federal tax reporting)_ `CG-MCE-063#S37`
  > “No particular IRS form must be used. However, the statement must include:
 Employee signature.
 Employee name, address, and Social Security number.
 Employer name and address, including the establishment name if different.
 The month or period covered by the report.
 Total cash tips received during the month or period.” — [Internal Revenue Service, U.S. Department of the Treasury — Tip recordkeeping and reporting](https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting), 2026-07-31; Required elements of the written statement, section "Report cash tips to the employer, unless the total is less than $20 per month with respect to that employer" (TEXT.txt lines 269-274). Verified 2026-09-09.

_Partly established. Established: the employee's obligation to report tips to the employer (S26, S36); any threshold that triggers it (S26, S36); the record that report must take (S36, S37). Missing: the cadence of that report._

## What you must do with the tips your employees report
<a id="need-CG-MCE-063-P6"></a>

- See above: The Internal Revenue Code requires an employee to report all cash tips received to their employer in a written statement, unless the total tips received with respect to that employer are less than $20 for the calendar month. ([CG-MCE-063#S36](#s-CG-MCE-063-S36))

- <a id="s-CG-MCE-063-S39"></a>Tips reported to the employer by the employee must be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips) and Box 7 (Social security tips) of the employee's Form W-2. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: employers with tipped employees, accounting_basis: federal tax reporting)_ `CG-MCE-063#S39`
  > “Tips reported to the employer by the employee must be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social security tips) of the employee's Form W-2.” — [Internal Revenue Service, U.S. Department of the Treasury — Tip recordkeeping and reporting](https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting), 2026-07-31; Section "Employer and other payor responsibilities" (TEXT.txt line 311). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S40"></a>Under section 3121(q), tips an employee receives in the course of employment are treated as remuneration for that employment and are deemed paid by the employer for purposes of the employer share of FICA (social security and Medicare) taxes under sections 3111(a) and (b), with the remuneration deemed paid when the employee furnishes the employer a written statement including the tips under section 6053(a). _(jurisdiction: United States (federal), entity_scope: employers subject to FICA and their tipped employees, conditions: Rev. Rul. 2012-18, published in Internal Revenue Bulletin 2012-26 (June 25, 2012); Rev. Rul. 95-7 modified and superseded)_ `CG-MCE-063#S40`
  > “Under section 3121(q) of the Code, tips received by an employee in the course of the employee’s employment are considered remuneration for that employment and are deemed to have been paid by the employer for purposes of the employer share of FICA taxes imposed by sections 3111(a) and (b), that is, social security tax and Medicare tax, respectively. The remuneration is deemed to be paid when a written statement including the tips is furnished to the employer by the employee pursuant to section 6053(a), discussed below.” — [Internal Revenue Service, U.S. Department of the Treasury — Internal Revenue Bulletin 2012-26, containing Rev. Rul. 2012-18 (Section 3121 — Tips Included for Both Employee and Employer Taxes)](https://www.irs.gov/irb/2012-26_IRB), 2012-06-25; Part I, Rev. Rul. 2012-18, heading “Employer FICA Obligations”. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S41"></a>Each employee who has been allocated tips is given a Form W-2 showing the allocated amount in box 8; tip allocations have no effect on withholding income tax, social security tax, or Medicare tax from employees' wages, and allocated tips aren't subject to withholding and must not be included in boxes 1, 3, 5, and 7 of Form W-2. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: Employers that operate a large food or beverage establishment and their employees who have been allocated tips)_ `CG-MCE-063#S41`
  > “Give each employee who has been allocated tips a Form W-2 that shows the allocated amount in box 8. Tip allocations have no effect on withholding income tax, social security tax, or Medicare tax from employees’ wages. Allocated tips aren't subject to withholding and must not be included in boxes 1, 3, 5, and 7 of Form W-2.” — [Internal Revenue Service, U.S. Department of the Treasury — Instructions for Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips](https://www.irs.gov/instructions/i8027), 2026-04-30; General Instructions > Reporting Allocated Tips to Employees. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

## Withholding, employer tax on tips, and the large-establishment allocation rules
<a id="need-CG-MCE-063-C4"></a>

- <a id="s-CG-MCE-063-S42"></a>Employers are required to withhold taxes, including income taxes and the employee's share of Social Security tax and Medicare tax, based on the wages and tip income received by the employee, and must deposit those taxes. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: employers with tipped employees, accounting_basis: federal tax reporting)_ `CG-MCE-063#S42`
  > “Employers are also required to withhold taxes (including income taxes and the employee's share of Social Security tax and Medicare tax) based upon wages and tip income received by the employee and must deposit these taxes.” — [Internal Revenue Service, U.S. Department of the Treasury — Tip recordkeeping and reporting](https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting), 2026-07-31; Section "Employer and other payor responsibilities" (TEXT.txt line 310). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S43"></a>Employers are required to pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: employers with tipped employees, accounting_basis: federal tax reporting)_ `CG-MCE-063#S43`
  > “In addition, employers are required to pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income.” — [Internal Revenue Service, U.S. Department of the Treasury — Tip recordkeeping and reporting](https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting), 2026-07-31; Section "Employer and other payor responsibilities" (TEXT.txt line 310). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S45"></a>The employer must allocate tips among employees who receive them if the total tips reported to the employer during any payroll period are less than 8% (or the approved lower rate) of the establishment's gross receipts for that period; the allocation is made to each directly tipped employee with a reporting shortfall for the payroll period, and no allocation is made to indirectly tipped employees. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: Employers that operate a large food or beverage establishment)_ `CG-MCE-063#S45`
  > “You must allocate tips among employees who receive them if the total tips reported to you during any payroll period are less than 8% (or the approved lower rate) of the establishment's gross receipts for that period. The allocation is made to each directly tipped employee performing services for the establishment who has a reporting shortfall for the payroll period. No allocation is made to indirectly tipped employees.” — [Internal Revenue Service, U.S. Department of the Treasury — Instructions for Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips](https://www.irs.gov/instructions/i8027), 2026-04-30; General Instructions > Allocation of Tips. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-063-S46"></a>Employers must annually report to the IRS the receipts and tips from their large food or beverage establishments using Form 8027, and they also use Form 8027 to determine allocated tips for tipped employees. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: Employers that operate a large food or beverage establishment)_ `CG-MCE-063#S46`
  > “Employers must annually report to the IRS receipts and tips from their large food or beverage establishments. Employers use Form 8027 to report that information. In addition, employers use Form 8027 to determine allocated tips for tipped employees.” — [Internal Revenue Service, U.S. Department of the Treasury — Instructions for Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips](https://www.irs.gov/instructions/i8027), 2026-04-30; General Instructions > Purpose of Form. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

## Can the card processing fee come out of the tip?
<a id="need-CG-MCE-063-P7"></a>

- <a id="s-CG-MCE-063-S47"></a>Labor Code section 351 provides that the employer must pay the employee the full amount of the tip indicated on the credit card, so deducting credit card processing fees from tips is not legal. _(jurisdiction: California, United States (California Labor Code as enforced by the Labor Commissioner's Office / DLSE), entity_scope: Employers paying credit-card tips to employees covered by the California Labor Code, conditions: tip is indicated on a credit card)_ `CG-MCE-063#S47`
  > “No. Labor Code Section 351 provides that the employer must pay the employee the full amount of the tip that is indicated on the credit card.” — [Labor Commissioner's Office (Division of Labor Standards Enforcement), California Department of Industrial Relations — Tips and Gratuities - Frequently Asked Questions](https://www.dir.ca.gov/dlse/faq_tipsandgratuities.htm), March 2013 (only dated marker on the page: "(updated March 2013)" on the answer to Q&A 4); Tips and gratuities — Q&A 3 ("My employer is deducting the credit card processing fees from my tips. Is this legal?"). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Partly established. Established: whether the card processing fee attributable to the tip portion may reduce the tip paid to the employee (S47). Missing: how the fee is recorded on either resolution._

_Required authority: authoritative professional or accounting standard, primary regulator or government. Highest achieved: primary regulator or government._

## Deducting a card processing fee from a tip
<a id="need-CG-MCE-063-C6"></a>

- See above: Labor Code section 351 provides that the employer must pay the employee the full amount of the tip indicated on the credit card, so deducting credit card processing fees from tips is not legal. ([CG-MCE-063#S47](#s-CG-MCE-063-S47))

_Partly established. Established: whether an employer may reduce a card tip by the payment processing fee attributable to it (S47). Missing: how that permission varies by jurisdiction._

## The tip records you must create and keep
<a id="need-CG-MCE-063-P8"></a>

- See above: For each work day the daily record must show the amount of cash tips and charge tips received directly from customers or from other employees, and the amount of tips, if any, paid out to other employees through tip sharing, tip pooling or other arrangements, together with the names of those employees. ([CG-MCE-063#S27](#s-CG-MCE-063-S27))

- <a id="s-CG-MCE-063-S48"></a>Employers are required to retain employee tip reports. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: employers with tipped employees, accounting_basis: federal tax reporting)_ `CG-MCE-063#S48`
  > “Employers are required to retain employee tip reports.” — [Internal Revenue Service, U.S. Department of the Treasury — Tip recordkeeping and reporting](https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting), 2026-07-31; Section "Employer and other payor responsibilities" (TEXT.txt line 310). Verified 2026-09-09.

- <a id="s-CG-MCE-063-S49"></a>The employer must keep records substantiating any information returns, employer statements to employees, or tip allocations, and must keep those records for 3 years after the due date of the return or statement to which they relate. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: Employers that operate a large food or beverage establishment filing Form 8027)_ `CG-MCE-063#S49`
  > “You must keep records to substantiate any information returns, employer statements to employees, or tip allocations. The records must be kept for 3 years after the due date of the return or statement to which they relate.” — [Internal Revenue Service, U.S. Department of the Treasury — Instructions for Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips](https://www.irs.gov/instructions/i8027), 2026-04-30; Instructions for Form 8027 - Introductory Material > Reminders > Recordkeeping.. Verified 2026-09-09.

- <a id="s-CG-MCE-063-S50"></a>For service charges distributed to employees the employer must keep a record of the employee's name, address and Social Security number, the amount and date of each payment, and the amount of income, Social Security and Medicare taxes collected with respect to the payment. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: employers distributing service charges to employees, accounting_basis: federal tax reporting)_ `CG-MCE-063#S50`
  > “The employer must keep a record of the name, address, and Social Security number of the employee, the amount and date of each payment and the amount of income, Social Security, and Medicare taxes collected with respect to the payment.” — [Internal Revenue Service, U.S. Department of the Treasury — Tip recordkeeping and reporting](https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting), 2026-07-31; Section "Distributed service charges" (TEXT.txt line 323). Verified 2026-09-09.

- <a id="s-CG-MCE-063-S51"></a>With respect to employees who receive tips but for whom a tip credit is not taken under section 3(m)(2)(A), any employer that collects tips received by employees to operate a mandatory tip-pooling or tip-sharing arrangement must maintain and preserve payroll or other records containing the information and data required in § 516.2(a), plus the additional items listed in this paragraph. _(jurisdiction: United States (federal; Fair Labor Standards Act recordkeeping regulations of the U.S. Department of Labor), entity_scope: employers that collect tips received by employees to operate a mandatory tip-pooling or tip-sharing arrangement, conditions: applies with respect to employees who receive tips but for whom a tip credit is not taken under section 3(m)(2)(A); applies to an employer that collects the tips to operate a mandatory tip-pooling or tip-sharing arrangement; additional to, not in place of, the information and data required in § 516.2(a))_ `CG-MCE-063#S51`
  > “(b) With respect to employees who receive tips but for whom a tip credit is not taken under section 3(m)(2)(A), any employer that collects tips received by employees to operate a mandatory tippooling or tip-sharing arrangement shall maintain and preserve payroll or other records containing the information and data required in § 516.2(a) and, in addition, the following:” — [Wage and Hour Division, U.S. Department of Labor; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 29 CFR 516.28 - Tipped employees and employer-administered tip pools](https://www.govinfo.gov/content/pkg/CFR-2025-title29-vol3/pdf/CFR-2025-title29-vol3-sec516-28.pdf), 2025-07-01; § 516.28, paragraph (b) (introductory text); printed page 155. Verified 2026-09-09.

_Partly established. Established: the per-employee per-period tip report (S48, S53); the pool allocation (S27). Missing: the card tip settlement record; evidence of each payout; the retention obligation attached to them._

## Required tip records and how long to retain them
<a id="need-CG-MCE-063-C7"></a>

- See above: Employers are required to retain employee tip reports. ([CG-MCE-063#S48](#s-CG-MCE-063-S48))

- See above: The employer must keep records substantiating any information returns, employer statements to employees, or tip allocations, and must keep those records for 3 years after the due date of the return or statement to which they relate. ([CG-MCE-063#S49](#s-CG-MCE-063-S49))

- See above: For service charges distributed to employees the employer must keep a record of the employee's name, address and Social Security number, the amount and date of each payment, and the amount of income, Social Security and Medicare taxes collected with respect to the payment. ([CG-MCE-063#S50](#s-CG-MCE-063-S50))

- See above: With respect to employees who receive tips but for whom a tip credit is not taken under section 3(m)(2)(A), any employer that collects tips received by employees to operate a mandatory tip-pooling or tip-sharing arrangement must maintain and preserve payroll or other records containing the information and data required in § 516.2(a), plus the additional items listed in this paragraph. ([CG-MCE-063#S51](#s-CG-MCE-063-S51))

- <a id="s-CG-MCE-063-S52"></a>The employer must check the Yes or No box indicating whether the establishment accepts credit cards, debit cards, or other electronic settlement methods, and if Yes, must complete lines 1 and 2 with the appropriate amounts shown on the charge receipts. _(jurisdiction: United States (federal tax law administered by the IRS), entity_scope: Employers that operate a large food or beverage establishment filing Form 8027)_ `CG-MCE-063#S52`
  > “You must check either the “Yes” or “No” box to indicate whether or not the establishment accepts credit cards, debit cards, or other electronic settlement methods. If the “Yes” box is checked, lines 1 and 2 of Form 8027 must be completed, and you must enter on lines 1 and 2 the appropriate amounts shown on the charge receipts.” — [Internal Revenue Service, U.S. Department of the Treasury — Instructions for Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips](https://www.irs.gov/instructions/i8027), 2026-04-30; Specific Instructions > Does This Establishment Accept Credit Cards, Debit Cards, or Other Charges?. Verified 2026-09-09.

- <a id="s-CG-MCE-063-S53"></a>The records must include the weekly or monthly amount of tips received as reported by the employee to the employer; that record may consist of reports made by the employees to the employer on IRS Form 4070. _(jurisdiction: United States (federal; Fair Labor Standards Act recordkeeping regulations of the U.S. Department of Labor), entity_scope: employers of tipped employees whose wages are determined pursuant to section 3(m) of the Act, conditions: item required under § 516.28(a); the reporting period is stated as weekly or monthly; IRS Form 4070 is offered as something the report may consist of, not as the required form)_ `CG-MCE-063#S53`
  > “(2) Weekly or monthly amount reported by the employee, to the employer, of tips received (this may consist of reports made by the employees to the employer on IRS Form 4070).” — [Wage and Hour Division, U.S. Department of Labor; published in the Code of Federal Regulations by the Office of the Federal Register and the U.S. Government Publishing Office — 29 CFR 516.28 - Tipped employees and employer-administered tip pools](https://www.govinfo.gov/content/pkg/CFR-2025-title29-vol3/pdf/CFR-2025-title29-vol3-sec516-28.pdf), 2025-07-01; § 516.28, paragraph (a)(2); printed page 155. Verified 2026-09-09.

_Partly established. Established: employee tip reports among the tip records an employer is required to create and retain (S48, S53). Missing: pool allocations among the tip records an employer is required to create and retain; payout evidence among the tip records an employer is required to create and retain; the retention obligation attached to them._

## Reconciling the tip liability account each period
<a id="need-CG-MCE-063-P9"></a>

- See above: The textbook states that liabilities require a future disbursement of assets or services arising from a prior business activity or transaction. ([CG-MCE-063#S14](#s-CG-MCE-063-S14))

- See above: Businesses subject to sales taxation hold the sales tax collected in a Sales Tax Payable account until payment is due to the governing body. ([CG-MCE-063#S15](#s-CG-MCE-063-S15))

- See above: Under § 531.54(b)(2), an employer that facilitates tip pooling by collecting and redistributing employees’ tips does not violate the section 3(m)(2)(B) prohibition against keeping tips if it fully distributes any tips it collects no later than the regular payday for the workweek in which the tips were collected, or, where the pay period covers more than a single workweek, the regular payday for the period in which that workweek ends. ([CG-MCE-063#S19](#s-CG-MCE-063-S19))

_Not established from an authoritative source._

_Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government._

## Not yet fully established from an authoritative source

- Establish whether tips collected by an employer on an employee's behalf are the employee's property held by the employer rather than employer revenue, and the accounting treatment that follows from that characterisation, including how tips an employee receives and keeps directly are treated where the business receives no cash at all, and how tips that are pooled, allocated among participants and passed on to other roles are carried and cleared in the accounts. _(partly established; below the required authority class)_
- Establish the criteria that distinguish a voluntary tip from a mandatory service charge or automatic gratuity, and the different revenue and payroll treatment each receives, and establish whose property a tip is once the employer has collected it and until it is paid over to the employee. _(partly established)_
- Establish the employee's obligation to report tips to the employer, the cadence and any threshold that triggers it, and the record that report must take. _(partly established)_
- Establish the rules governing tip pooling and sharing arrangements - which roles may participate, whose participation is restricted, and what the employer may and may not require. _(partly established)_
- Establish whether an employer may reduce a card tip by the payment processing fee attributable to it, and how that permission varies by jurisdiction. _(partly established)_
- Establish the tip records an employer is required to create and retain, including employee tip reports, pool allocations and payout evidence, together with the retention obligation attached to them. _(partly established)_
- Establish the bookkeeping treatment of a card settlement containing sales, amounts collected as tax and tips - why the gross settlement is not revenue and what liability the tip portion creates until it is paid out, and the treatment of a payment processing fee attributable to the tip portion under either resolution of whether it may be charged against the tip. _(not established; below the required authority class)_
- Establish how mainstream point-of-sale systems and tip distribution applications settle card tips - whether the tip amount reaches the business's own account before it is paid out, by what route and on what cadence the employee is paid, and what record of each distribution the system leaves for the employer. _(not established)_
- Establish that a tip belongs to the employee and is therefore held by the business rather than earned by it, and separate that from a mandatory service charge the business imposes, which is the business's own revenue and reaches the employee through a different route. _(partly established; below the required authority class)_
- Show how a card settlement is decomposed on receipt into revenue, amounts collected as tax, and tips held for employees, and establish why recording the gross settlement as sales is not a presentational shortcut but a misstatement of revenue and an unrecorded liability. _(not established; below the required authority class)_
- Distinguish the routes by which the tip liability is cleared - cash paid at shift end, paid through the pay run, or distributed directly to the employee by the point-of-sale or a tip application - and show what each does to the liability balance and what each still owes to payroll. _(partly established; below the required authority class)_
- Explain why cash tips the employee takes directly never enter business cash or revenue, yet still have to enter payroll once the employee reports them, and how that is recorded without inventing a cash receipt the business never had. _(established; below the required authority class)_
- Set out how a tip pool is recorded: the amounts entering the pool, the allocation among participants, tip-outs to other roles, and the record that evidences the allocation - together with the constraint on who may share in a pool. _(partly established; below the required authority class)_
- Address whether the card processing fee attributable to the tip portion may reduce the tip paid to the employee, and show how the fee is recorded on either resolution. _(partly established; below the required authority class)_
- Specify the tip records that must be created and retained - the per-employee per-period tip report, the pool allocation, the card tip settlement record and evidence of each payout - and the retention obligation attached to them. _(partly established)_
- Require a periodic reconciliation of the tip liability account, tying tips collected to tips paid out and reported, and explain what a persistent balance in either direction indicates. _(not established; below the required authority class)_

## Related

- [How do I create a record of cash sales when nothing generates a receipt, invoice or statement?](https://uppago.com/resources/how-do-i-create-a-record-of-cash-sales-when-nothing-generates-a-receipt-invoice)

_Reference date 2026-09-07. Statements are quoted verbatim from their sources; scope and verification dates are shown on each._