How To DIY: Managing Day To Day Liability – Tips

Why do you think liabilities are more important for restaurants than most small businesses? Mainly because they occur much more frequently than most small businesses. Between the sales tax to the vendor payments….they are occurring weekly if not daily. Many times there are multiple delivery trucks arriving daily and varying services provided on the regular. Because of the frequencies, it is vital that you understand and track them accurately.

For most restaurants, major liabilities – or, the categories in which restaurants owe money, such as tips, sales tax, short and long term debt, and accounts payable.

In this week’s blog posts we are going to discuss Tips and on Thursday’s blog post we will discuss Sales Tax.

Tips:

Tips or gratuities can be defined as money given by choice on top of a bill or invoice and not considered part of the sale. It is important to understand that tips are simply money flowing into the restaurant that is not yours. Tips may be collected in form of credit card tips, cash tips, or a combo of both.

As you already know, tips are so important in the restaurant world. Most servers, bartenders, etc. do not define tips as voluntary. Tips are expected, and they are usually between 15-20% of the bill/invoice total.

You should track tips via journal entries in QuickBooks on both the sales side and the payroll side. These tips will appear on the Balance Sheet and are reflected as a current liability. That means they should not appear on the income statement at all but should be included as an expense under payroll. Another way to think about it is that tips are a liability…they are held for the servers not as revenue for the restaurant.

There are 2 ways to pay out the tips:
Inflows: Tips tend to flow into the business daily either in cash format or from your payment processor. For example, a customer can leave cash for a tip or add it to their credit card receipt.
Outflows: Tips come in and are held in trust for your employees and then remitted to them on payday

There are a few options for distributing tips:
An employee is allowed to take all their tips home on the day they work (restaurant tends to act as a bank to the employees as they are essentially loaning money to them before they even receive all the money).

1. An employee is allowed to take all cash tips home on the day they work.
2. An employee is not allowed to take any tips home.

We recommend option #2

According to the IRS, in order to determine if a payment is treated as a tip, these four factors must be considered:
The payment must be made free from compulsion;
The customer must have the unrestricted right to determine the amount;
The payment should not be the subject of negotiations or dictated by employers policy; and
Generally, the customer has the right to determine who receives the payment.

Basically, if these factors do not justify the payment being treated as a tip, then it is treated as a service charge – – which is a whole other subject and another blog post!

Tip Reporting Requirements:

As the restaurant owner, the employee tips should be your concern to make sure employees are accurately reporting their tips as the restaurant could be liable if you help your employees underreport tips.

Once you form a tipping policy, we recommend that you document and distribute it to each employee when hired. It should clearly outline your restaurant’s process for handling tips and how employees are expected to report the tips they collect.

Do you have any questions at all or, need help to manage your day to day liabilities?

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