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Paying Out Tips – Nightly, Weekly, Payroll? What’s the Whirks Way? 

March 28th, 2023 | 4 min. read

By Mike Shaeffer

Do you remember your first day of work at your job? I remember being equally excited for the new adventure and anxious about how well I would do. I remember saying everyone’s name repeatedly in my head so that I could start to get to know my new team. I also remember looking at the calendar to find out when I would get paid! 

At our company, we get an email each time we get paid that starts with, “It’s one of the best days of the month…Payday!” This is a true statement that the employees in your company probably echo. Every payday is a great day, but for certain industries and workers, payday cannot come soon enough.

For service-based workers in a tipped job, providing clarity around how you get paid and what you are being paid is super important for setting proper expectations. Let's explore a couple of the common methods employers use to pay out their tipped employees, as well as some best practice suggestions.

Paying Tips Daily 

One common method employers use in tipped industries is to pay out all tips daily. This would mean that at the end of the day/shift, all tips are accounted for and paid out in cash to the appropriate employees. The biggest advantage to this method is the immediate gratification an employee can receive by taking home their earnings each day. For lower wage earners, this can be especially important as it allows for available cash to be used to pay current bills. 

In a situation where tips are paid daily, it is common for a worker to also be paid a tipped wage that is below minimum wage, where they are expected to receive enough tips to bring their hourly rate to or above minimum wage. The hours worked multiplied by the tipped rate will be paid out on the paycheck according to the company’s set payroll schedule, which is commonly done on a weekly or bi-weekly basis. This means that an employee is paid their tips daily, but also receives a paycheck regularly.  

There are two main issues with taking a daily payout approach to tips. First, it requires having enough cash on hand to cover all tips. Second, paying out tips daily can create payroll tax issues for your employees. These issues can create an additional burden for the employer that may be heavy enough to make a daily payout undesirable. 

You must have cash on hand

For daily payouts, you are required to have a significant amount of cash on hand. Think about how popular debit and credit cards have become over the years. For most tipped businesses, the tips are actually being paid using debit/credit cards. If you pay out your credit card tips daily, this requires getting cash in the building to distribute at the end of the shift, which is cash that will not actually be received until the credit cards are settled, which typically takes a few days. Not only does this create a negative cash flow moment, but it also means that daily cash runs will need to be made and significant cash will be stored on-site, which creates security concerns. 

Potential for a payroll tax burden for the employee

The second lesser-known issue that daily payouts create is a possible payroll tax burden for the employee. Tips are considered taxable wages to employees which means that there needs to be income tax withheld on the amount of tips received. Often, the income tax liability that is generated by tips will exceed the amount of wages the employee has earned which means the employee hasn’t fulfilled the entire tax obligation with payroll and will have to pay additional taxes when they file their income tax return. 

Here is an example of a paycheck that would illustrate this point: 

In this example, our employee worked 23 hours at $2.13 per hour which equates to $48.99 in wages. The employee also received $1325.00 in tips that they already took home, meaning they are not paid out on this check. The tax liability on these earnings is higher than the $48.99 in wages, which means the employee will receive $0.00 on this check, but also will be under-withheld for both Social Security, Medicare, Federal, and State taxes. This under-withholding will result in more taxes being due when the employee files their tax returns, and possibly the addition of penalties.  

Paying Tips with Payroll 

Another option used by employers is to not pay any tips out until payday. In this scenario, the employee does not take home any cash after their shift and is treated like a traditional worker that receives all of their pay with the regularly scheduled check. As you can imagine, this option may not be favored by many workers and can cause difficulties in competing for talent with other companies that may offer more frequent access to tips. 

The advantage to waiting for your pay date to pay out tips is threefold. First, you remove the to keep large sums of cash on hand. Second, it eliminates any payroll tax issues the employee may face. And finally, it allows for positive cash for the employer. In addition to these key advantages, it also allows for singular clarity with all payouts an employee receives: everything happens on the paycheck. 

Our suggestion: keep your options open 

I once heard a wise man say, “When you only have bad options, you need more options.” I believe there is a hybrid approach here that can satisfy your workers' desire to receive cash on a more frequent basis while not adding any additional administrative burden on the organization: Cash tips get taken home daily and reported through payroll. In contrast, credit card tips get paid out on a paycheck that occurs weekly. This approach allows employees access to their funds more readily, but it also reduces payroll tax issues since a large chunk of tips will come from credit cards paid out weekly. 

This hybrid approach allows employees to receive some of their tips daily and eliminates additional payroll tax burden for the employee. This solution aims to remove barriers to hiring additional staff while not overloading the existing management staff with an additional administrative burden for payroll and cash distributions. If successfully followed, you will find that employees appreciate the immediate access to cash while also finding a weekly paycheck more enjoyable. 

At Whirks, we consistently try to develop the best solutions for our clients. This includes educating them about the common mistakes we see business owners make regarding their payroll and HR processes—things that can often have legal ramifications. Check out this article about the 3 Biggest Payroll Mistakes Restaurants Make so you can make sure your business has the best processes in place to stay above board and successful. Want to learn more about what we do?