4 Best Practices for Accounting for Tips in Your Restaurant

4 Best Practices for Accounting for Tips in Your Restaurant

December 18 2017

In the restaurant industry, many employees rely on tips as the primary source of their income. As with all wages, it is important for restaurants to ensure that tips are correctly managed and reported. Because tipped income functions differently from a traditional paycheck, it can often be confusing to know precisely how to account for this income.

We’ve compiled a list of four best practices to make sure that your restaurant business is handling tips in the proper way.

1. Understand your responsibilities as an employer.

Although your customers are the ones who are paying tips and gratuities, it is still your responsibility as an employer to accurately record them. Tips traditionally come in the form of cash or an additional amount added to credit card payments. While they may not function the same way as a traditional paycheck, tips still count as an income paid by your business to your employees and must be reported as such. In order to avoid tangling with the IRS, it is essential to account for any tipped income earned by your employees accurately.

2. Have a clear policy regarding how tips are managed.

To make sure tips are appropriately managed and reported, it is best to set clear guidelines from the start. Because all restaurants function differently, it is important to create policies and practices that fit with the unique nature of your business. Once you have determined the best way for your restaurant to handle tips, it is essential that all employees have a clear understanding of your rules. Employees should be educated and fully informed of your tip policies and procedures at their time of hire.

3. Put technology to work for you.

In today’s age of technology, there are many programs to help take some of the stress and confusion out of dealing with tip-related income. Many point-of-sale (or POS) systems automatically record any tips left on a credit card. These systems are often able to link directly to your payroll or bookkeeping software, eliminating the tedious and time-consuming process of manually entering and accounting for tips. There are many user-friendly software programs to assist restaurant owners with managing tips. Put that technology to use in your restaurant and save yourself some time and hassles.

4. Enlist the help of a professional.

It never hurts to enlist the help of a financial professional when dealing with the intricacies of your restaurant finances. A professional accountant or bookkeeper can help ensure that you are adhering to all state and federal tax guidelines. These professionals know the ins and outs of tax law and procedures and can make sure your business is accurately reporting all employee income.

Managing your employees’ tips in your restaurant can be confusing. If you'd like to learn more about reporting the tips collected in your restaurant, contact us for more information.

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