Is Tip Pooling Right for Your Restaurant? Pros, Cons, and Potential Tax Implications
By John Uhrynowski, Supervisor, Business Enterprise Services - Tax
There have been numerous discussions and articles about how businesses should properly report tips to the IRS to receive their tip credits. But what about the proper way restaurants and fine dining should handle tips within their organizations? Let’s take look at the common practices of the restaurant industry and how tip pooling typically works.
Tip Pooling 101
Tip pooling is a common restaurant industry practice in which restaurant employees combine their tips and divide them evenly among eligible staff. The tip pool often includes servers, bartenders, food runners, and other front-of-house staff who regularly and customarily receive tips. Tip pooling can be beneficial for both the employer and employees, as it promotes a team-oriented atmosphere and helps to ensure that all staff members receive a fair share of the tips. Restaurant owners may want to use tip pooling as it can increase staff morale and productivity, reduce turnover, and simplify payroll and tip reporting. However, it’s important to note that tip pooling must be implemented in compliance with applicable federal, state, or local laws.
A tip pooling system typically starts with clearly defined rules on who does and does not participate, and how the tips are distributed. Typically, restaurants pool tips from all servers, bartenders, food runners, and bussers who serve customers. However, staff who do not customarily and regularly receive tips, such as managers, dishwashers, and cooks, aren’t usually part of the tip pool. The tips are then divided according to an agreed-upon method, typically based on the number of hours worked. For example, someone who works an eight-hour shift would receive more tips than someone who only worked a four-hour shift. However, restaurants must ensure that the distribution process is equitable and not simply based on seniority or other factors that could lead to unfairness.
As an employer, you must comply with any and all federal, state, and local requirements concerning tips received by all employees. For the purposes of reporting tip income, however, the U.S. Department of Labor classifies tipped employees as those who customarily and regularly receive more than $30 per month in tips.
As a restaurant owner or manager, implementing a tip pool has both advantages and disadvantages to consider. The weight of pros and cons will be different based on the experience mix of your team, number of employees, average work hours per week, and several other factors. As with any decision in business, it’s important to consider how a tip pooling arrangement would affect your operation before implementing one.
Tip Pooling Benefits
Tip pools generally benefit employers most when there is a significant disparity between key positions in the daily operations of the restaurant. For example, if your restaurant uses a host staff, the hosts often do not receive tips and usually make a minimal hourly wage in comparison to wait staff or bartenders once tips are considered. Without a tip pool, you may find it difficult to find employees willing to fill this important role. By allowing hosts to participate in the tip pool, employers can offer an extra incentive for qualified employees to stay in this position.
Ensuring that all employees are treated fairly when it comes to tipping is no easy task, and even with a tip pool, employers are still likely to face some challenges with tipped employees. Collecting, calculating, tracking, and distributing tips can put a considerable amount of extra work on the employer, especially if there are many employees on every shift. Managing the pool can be even more difficult when employee start and stop times carry over across different shifts.
When disputes arise over division of tips, this can also add complexity to employer/employee relationships and put managers in an awkward position if mistakes are made in the calculation process. Mistakes can also open the employer up to penalties or fines, especially if they are out of compliance with relevant employment laws and regulations. To minimize risk, employers must follow tip pooling best practices and proactively keep on top of any changes that affect how tip pools can be implemented.
Tax Implications of Pooling Tips
A final important consideration when reporting tip income for your restaurant involves how the tip pool may affect your bottom line. You may qualify for the FICA Tip Tax Credit if your company meets certain basic requirements. However, a tip pool could affect how much of a credit you can claim. On the other hand, a tip pool could help offset the minimum wage requirement for employees who may not otherwise receive enough in tips to make up the difference. Finally, it could cost your organization a significant amount of time, and ultimately money, to manage and enforce a tip pool. All of these considerations, both positive and negative, can help you determine if a tip pool is right for your restaurant.
- Paychex, Inc.