The Ultimate Guide to Restaurant Tip Management

Restaurant tip management can be confusing and time-consuming, especially if your restaurant has a large staff. Differences in state laws regarding employee wages and tipping, as well as the overall increase in credit card usage, further complicate how tips are shared with your employees.

If you own or run a restaurant, you’re responsible for creating an in-house tipping system that’s fair to both your front-of-house and back-of-house staff members — as well as your customers.

Read on to learn everything you need to know about managing tips in your restaurant — or click here to schedule a demo with our team to hear more about how Kickfin can help manage your restaurant’s tips.

Understanding tips and wages

Federal law requires that everyone employed in the U.S. be paid at least $7.25 per hour. Many states have minimum wages higher than the federally-mandated minimum. However, due to the long-standing practice of tipping, many states have instituted lower paid minimum wages for employees expected to supplement their income with tips. Paying a wage lower than $7.25 to tipped employees helps your business save money, but is not legal in every state and situation.

For example, according to the U.S. Department of Labor, it’s legal to pay tipped employees in Alabama as little as $2.13 per hour if the employee earns at least minimum wage by the time tips are factored in. However, in Washington, D.C., establishment owners must pay tipped employees a full wage of $8.00 per hour, regardless of tips earned. This wide variation makes it important to consult with a local employment lawyer versed in your state’s laws when establishing your restaurant’s tipping system.

What is a tipped minimum wage?

The federal minimum wage is $7.25 per hour, with many states implementing higher minimum wages. However, employers can pay employees who regularly receive tips a lower direct hourly wage, known as the tipped wage. A tipped wage is typically lower than the standard minimum wage and is set by law. The rationale behind these laws is that tips employees receive make up the difference between the rate the employer is paying and the minimum wage.

For the tipped minimum wage system to be valid, an employee must actually earn at least the state’s minimum wage after tips. Most businesses accomplish this by requesting that employees report tip earnings at the end of each shift. The business then adds together the total amount of money the employee has earned in tips versus an hourly wage and divides this figure by the number of hours the employee has worked. If this calculation reveals that the employee did not earn minimum wage, the employer must supplement their income.

What is a tip credit?

A tip credit is the extra money an employer must pay to an employee to make up the difference between the tipped wage and the state’s minimum wage.

Let’s take a look at an example of a situation where an employer might need to supplement a tipped minimum wage. Imagine you manage a restaurant in a state where the tipped minimum wage is $5 an hour and the standard minimum wage is $10 per hour. After working a 40-hour week, one of your employees reports a total tip-out of $180.

However, if your state has a minimum wage of $10 per hour, this means that any of your employees who work at least 40 hours must receive at least $400 in total compensation ($10 per hour). If an employee only earns $380 between wages in tips, you would need to make up the difference by including an extra $20 tip credit in the employee’s check.

If the employee earns more than minimum wage when calculating tips plus wages, no action is taken. For example, you can’t reduce an employee’s wages to $0 if they earn more than minimum wage in tips alone.

How to collect tips

There are a variety of ways your restaurant can accept tips from customers. Some of the most common ways to collect tips include:

  • Cash: Cash is the most straightforward way to accept tips. Each employee may keep the cash they collect on each check, or pool tips together to split among the staff.
  • Credit cards: Many customers prefer to put their tips on the credit card they use to pay for their meals. Accepting tips via credit card is convenient for customers, but will require calculation via your in-house system to pay them out correctly.
  • Third-party payment apps: Some establishments ask individual employees to create payment accounts with third-party payment apps, like Venmo and CashApp.

Employees are allowed to independently collect tips with their user codes. These tips are usually treated as cash for reporting purposes, making this method unsuitable for establishments that pool tips.

Many modern point of sale (POS) systems or terminals used in restaurants have the functionality to suggest tip amounts to customers during the payment process. If using these systems, ensure your tip recording and reporting system complies with local regulations.

How do you combine cash and charged tips?

If your restaurant receives both cash and charged tips, it’s essential to have a clear process in place to handle and distribute them appropriately. This requires keeping a careful record of all tips received — regardless of whether they’re in cash or on a credit card. Most POS systems include a mechanism to collect this information automatically as it’s entered, but you may want to keep an additional backup record.

Store cash tips securely and separately from other funds to ensure accurate accounting and distribution. Establish a process where employees can safely deposit their cash tips in designated envelopes or containers, and have a standing protocol around who can access funds and how. It can be helpful to keep cash tips locked in a manager’s office until distribution.

There are a few options for disbursing credit card tips to employees. You can pay out credit card tips in cash to employees at the end of the day, but this requires taking credit card tips from the restaurant’s cash reserves, which may be limited during slow seasons. You can also include credit card tips on each employee’s wage check.

However, this strategy may require spending more resources on accounting and billing to ensure all employees are fully compensated.

And, keep in mind: Many hospitality employees are drawn to the industry because of the promise of daily payouts. Putting tips on payroll can be hard on your staff, especially if they’re accustomed to nightly tip-outs and have to start waiting days or weeks to receive their tip earnings.

A cashless tip distribution solution can be a helpful tool in streamlining and simplifying the process of distributing tips, especially when combining cash and charged tips. With a cashless solution, charged tips can be directly deposited into individual employee accounts or a centralized tip pool, reducing the need for manual handling of cash or checks. This also reduces the chances of making a costly mistake when distributing employee tips and calculating wages.

Ways to distribute tips to your employees

“Tipping out” refers to the service industry practice where employees who receive tips share a portion of those earnings with other employees who provide a service or support role during the customer’s experience. For example, while servers might directly receive tips, house rules might establish that servers tip out a small percentage of the tips they collect to the back-of-house staff or hosts who do not collect tips.

Not every establishment tips out, with some electing to pay higher wages to non-tipped employees. These are some of the most common tip division and redistribution strategies to consider for your restaurant:

Individual employee tips

The easiest method to handle tips is to allow each employee to keep the tips that they individually earn. Only tipped-wage employees are required to earn tips, so this method empowers those interacting directly with customers to keep the tips that they collect. However, this method benefits only individual tipped employees and may lead to uneven earnings across your staff.

Tip pooling

Tip pooling is a practice common in the service industry where a portion of the tips received by employees is combined into a common pool and then distributed among a group of eligible employees. Rather than keeping individual tips, employees contribute a portion of their earnings to be shared among the team.

 

Typically, a predetermined percentage or formula is used to allocate the pooled tips among the eligible employees. This is usually based on employee roles and contributions to the overall customer service experience. Some establishments tip out the same percentage to all employees, while others devote a larger percentage to the individuals collecting the tips.

The purpose of tip pooling is to foster teamwork, incentivize collaboration, and ensure all employees involved in providing excellent service receive a fair share of the tips — even if they don’t directly interact with customers or receive individual tips.

However, tip pooling may also foster contempt amongst employees, particularly if employees earning minimum wages receive the same percentage of tips as tipped-wage employees. That’s why it’s important to weigh the pros and cons for your team, ensure your policy is fully compliant with tip pooling laws, and create a culture of communication and feedback channels so you can understand what’s working and what’s not.

Percentage-based tip-outs

Percentage-based tip-outs involve distributing a specific percentage of the total tips earned by an employee to other individuals or groups. By dividing tips by varying percentages, management can ensure that tipped employees receive a larger percentage of their tips while also keeping things fair for non-tipped employees crucial to the customer experience.

For example, let’s say your restaurant has a 20% tip-out policy and a server earns a $100 tip. In this case, the employee will be required to distribute 20% of their tip ($20) to non-tipped employees. Depending on your restaurant, this may include hosts, prep cooks, bussers, and other qualifying employees. The remaining 80% of the server’s tip ($80) is theirs to keep.

Point system tip-outs

Some establishments use a points-based tip-out system. In a points-based tipping system, rather than distributing a percentage of the total tips, a certain number of points are allocated to each employee, and these points are used to distribute the tips among the team.

Let’s take a look at another example using a $100 tip. If your restaurant uses a point system, you might assign a server 50 points, a bartender 30 points, and a busser 20 points. In this example, points correlate to percentages, so a server would keep $50 of the tip. Accordingly, the bartender would receive $30, while the busser receives $20.

Points-based tipping systems allow for a more customized and flexible distribution of tips, considering the different roles and contributions of the employees. The allocation of points can be based on factors such as seniority, job responsibilities, or performance evaluations, enabling a more nuanced approach to distributing tips among the team.

Tax and reporting obligations

The IRS has specific regulations regarding tip reporting, withholding, and taxation. Failing to comply with these requirements can result in legal and financial consequences.

As a business owner, it’s crucial that you take steps to keep tips and payouts in order. Following these tips can help you stay on the right side of the law:

  • Keep accurate records: Keep detailed records of all tip income, including cash and charged tips. Document tip allocations, distribute tips promptly, and maintain accurate records of tip pools and distributions. This documentation will be valuable in case of audits or employee inquiries.
  • Implement clear and consistent policies: Establish written policies on tip reporting, allocation, and distribution. Ensure employees understand these policies and provide regular reminders or training sessions to reinforce compliance. This will help prevent disputes with employees, especially those collecting tips.
  • Educate employees on their responsibilities: Train your staff on the IRS requirements for tip reporting and explain the importance of accurate record-keeping and reporting. Encourage employees to report their tip income correctly and provide them with resources or guidelines to do so.

Remember that as the business owner, the responsibility to maintain financial records falls on your shoulders. This is one area where a cashless tip management system can be majorly beneficial.

How software makes restaurant tip management easier

Even the most organized business owners can find themselves confused when managing dozens of tipped employees. Software, including tax reporting software and POS management systems, can make the process of tracking payouts and income easier. In particular, a cashless tip management system can provide a host of benefits to employers and employees themselves.

Enhanced accuracy and transparency: Cashless systems provide accurate tracking and recording of tip transactions. This helps ensure that tips are distributed correctly and transparently and minimizes the risk of human error that can lead to lawsuits and claims of improper employee payments.

More convenient for employees: Cashless tip distribution allows employees to receive their tips directly in their bank accounts or digital wallets, offering flexibility and convenience. With a growing consumer trend toward digital payments, some employees prefer the ease of non-cash payouts.

Increased efficiency: Cashless systems streamline tip distribution. Instead of manually handling cash, the system automates the process, saving time and reducing administrative burdens. Employees also don’t need to worry about the risk of loss and theft that comes with carrying cash.

How Kickfin helps with restaurant tip management

Kickfin really helps restaurant managers with facilitating the cashless disbursement of tips to eligible employees. Fewer and fewer customers pay for transactions with cash — which is why so many managers find themselves running to the bank on a daily or weekly basis because the safe is empty, and there’s not enough cash to pay out tips.

With Kickfin, you’re able to track your tipped employees’ earnings through your normal POS, and quickly total their tipped earnings at the ends of their shifts. Then, with the touch of a button, you can distribute their tips to them electronically, without having to count cash or stuff envelopes. And your employees’ tips hit their accounts instantly.

Click here to learn more about Kickfin and how our cashless tipping solution can work for you

You might also be interested in

We know how important same-day payments are for veterans of the service industry who are accustomed to quick cash — and we’re now seeing that same demand expand into other industries as well. 

Kickfin co-founder Justin Roberts joined MasterCard’s InConversation Webinar series to discuss why immediate payment disbursal is key for the restaurant industry and the gig economy as a whole.

Watch the webinar here or read our recap for the highlights: 

People live paycheck-to-paycheck

Not just some people are living paycheck to paycheck. Most people are. 

That’s right: around 64% of U.S. consumers are just getting by. Even more shocking, 51% of consumers who earn over six figures are still living paycheck to paycheck, despite their higher tax bracket. 

It’s a major reason why employees need access to their earnings sooner rather than later. The pressure of watching your bank account slowly drain in the two weeks between payday is putting a lot of pressure on people, leading to a much greater demand for instant payments than ever before. 

Instant payouts are now table stakes

A PYMNTS study found that people of all ages prefer to be paid out immediately, as well as some other interesting statistics:

  • When given the choice, 68% of respondents said they would opt for an instant pay out
  • 40% of gig workers surveyed were willing to pay a fee for an instant disbursement
  • 81% of respondents were willing to switch jobs to an employer that offers instant access to earned wages and tips

It’s safe to say instant payouts are becoming the expectation for today’s modern workforce. But not all instant payouts are created equal.

Consumers are much more likely to engage with an instant payout system if they aren’t required to share their bank account and routing numbers and can access funds with just their debit card credentials. Why? It’s faster, more convenient, and feels more secure. 

Instant payouts and tip management: a perfect use case.

Instant payout innovation has come at the perfect time for the restaurant industry, which is struggling more than ever with the hassles and cost of cash.

If you’re in the restaurant biz, then you know: Most consumers pay with credit cards these days, not cash. That means there’s rarely enough cash on hand to pay out tips at the end of a shift. But employees still want and need instant access to their tip earnings.

Enter: instant payouts. Offering employees the option to receive their tip earnings directly to their bank of choice, the second their shift ends, can go a long way in improving employee satisfaction and ensuring their financial security.

But instant payouts are more than a work perk for employees. The operational benefits for employers range from reduced administrative burden and significant time savings to stronger compliance and streamlined reporting.

Modernizing your tip management strategy: 5 best practices 

There are three key components to your tip management strategy: 

  • Tip pool policy: How are you divvying up tips among your staff? 
  • The payout method: How are you distributing those payments?
  • The systems and tech: What are you using to facilitate those payments?

Under the current circumstances, restaurant operators are under immense pressure to bring their tip management into the future. 

5 best practices for tip management 

Based on our experience working with restaurant operators across the country, we’ve found that these five practices are the perfect recipe for building a successful tip management system.  

  1. Determine the right model and method for your restaurant, based on your location and tech stack
  2. Get a written tip policy (and get it legally approved
  3. Solicit employee feedback in a structured way
  4. Leverage technology for efficiency, accuracy, and compliance
  5. Don’t over-complicate (but do over-communicate!)

Tip management solution must-haves

When seeking a new tip management solution, make sure you carefully vet each system to see if it really meets your needs, or if it’ll be just as frustrating as cash. Here are a few suggestions for what should be on your checklist: 

  • Instant payouts
  • Direct to bank of choice
  • Availability of employee funds
  • Payroll option 
  • Integrations 
  • Simple implementation + onboarding process 
  • Around-the-clock customer service 

Big emphasis on strong customer support teams. Restaurants and bars don’t have “typical” business hours, so neither should your tech support.

Bar Louie automates payouts with Kickfin 

In a recent case study, we took a deep dive into our partnership with Bar Louie, a chain with over 60 locations that took advantage of our new integration with Toast. They made the switch from cash payouts to Kickfin’s instant, direct-to-bank payouts and haven’t looked back.  

Two-minute tip-outs

Before Kickfin, managers spent an average of 45 minutes per shift working through Bar Louie’s complex tip out policy and counting cash. The tip pooling rules were important to them — it’s what makes the entire staff feel like they’re getting their fair share. 

Using the Kickfin0Toast integration, Bar Louie was able to automate the tip pool calculation process and send tips straight to employees in under two minutes – a potential annual savings of 15,000 labor hours across all locations.

>> See more customer success stories 

Do you want to see these kinds of cost-saving results at your business? Let’s talk. Get a demo of Kickfin and see why restaurant owners and employees alike trust us to manage their tips.

Kickfin’s best-in-class tip calculation tool has some exciting new bells and whistles.

If you’re already using Kickfin’s tip pool calculator, then you know how much time and hassle you’re saving by automating everything. (And if you’re not? Head over to our tip pooling software page to see how it works!)

As we partner with more restaurants to bring their tip management into the future, we’re continuing to innovate our product so we can address their biggest pain points.

In this case, that means enhancing our tip pooling features so you can auto-calculate tip amounts even for the most complex or unique tip pool or share policies.

Check out a few of our latest features that will make tip calculations easier than ever.

New Release: Splitting Large Party Tips 

If your restaurant often hosts large parties, you know that the tip share can get confusing. Say one server is taking care of a party of 40 with a bartender assigned to only make drinks for that party. Meanwhile, the server has a few other two-top tables that are getting drinks from the main service bar. At the end of the night, how do you ensure that the large-party bartender gets their fair share of the tip out (without spending an hour on your phone calculator)? 

Kickfin can now automate that process for you, alleviating questions from your event bartender and saving time and effort on the part of your managers. 

Seamless Integrations 

Kickfin is partnering with your POS system to integrate seamlessly with your existing restaurant tech. Already, we’re serving Toast customers through our integration — and your POS just might be up next. 

Kickfin integration users get access to new product features first, like our new tip-out transparency tool. Your employees can log into their Kickfin accounts and see exactly how their tips have been split between team members, offering them full transparency into your tip policy in action.

Manager Tips 

We’re always listening to feedback to improve the Kickfin experience, and this one goes out to all of our restaurant partners who asked us to streamline the manager tip reallocation process.

>>Learn more about managers & tipping laws

In most cases, managers are not allowed to earn tips since they are salaried employees. But we all know that managers often step in and take care of tables to help servers get out of the weeds. Well-meaning guests will most likely leave a tip, not knowing that the manager technically can’t accept them — so where does that money go?

Kickfin now features a default pool, where tips “paid” to a manager are automatically redistributed to tipped staff based on your restaurant’s tip policy. 

Improved Labor Data Accuracy

We all know how easy it is for an employee to forget to clock out after a long shift. And sure, they aren’t going to get paid for a 16-hour overnight shift, but when payday comes around, those extra hours create a nightmare for your payroll team. 

With Kickfin, all employees are required to be clocked out in order to finalize payments — so you’ll catch the labor data mistake long before your payroll team has to sort it out. 

Even Better Security 

We’re committed to protecting you and your employees’ hard-earned money, so we’re adding an extra layer of security for certain transactions. You can now enable double approval of payments that meet certain conditions:

  • First payment for new employees
  • Employees getting their first payout in X number of days
  • Employees receiving more than X payouts in a 24-hour period. 

With these extra guardrails in place, you can always be sure that the right money is going to the right person. Reach out to our support team to configure your custom security measures.

Using Kickfin is a win-win for operators, managers, and employees alike. Restaurateurs save on cash delivery and labor costs, managers shave hours off their workload, and servers have the same instant payment that they’re used to — without the hassle and uncertainty of cash. 

Want to learn more about Kickfin? Let us show you the ropes with a demo

You heard it here first: 2024 is the year of integrations. 

In an effort to make Kickfin even more user-friendly and adaptable for our partners, we’re working with restaurant tech leaders to integrate our tip management solution with their existing systems. 

First up — Toast! A trailblazer for cloud-based restaurant management technology, Toast is a favorite POS system for restaurants, food trucks, and bars. You probably know them best for being the first to create handheld POS devices, drastically changing the entire restaurant ecosystem. To make life easier for their customers, Toast partnered with Kickfin to create an integration that makes tip pooling, tip distribution, and calculation smoother. 

As restaurant tech innovators ourselves, this partnership is the perfect fit for Kickfin. 

Our goal at Kickfin is always to save time for managers, prevent loss for operators, and create more financial freedom for hospitality employees through pioneering technology that digitizes many of the analog processes that the restaurant industry is built on. 

As a member of the Toast Partner Ecosystem, we’ll be able to deliver our product to Toast customers and modernize their tip management systems with ease. Using technology that they’re already familiar with, Toast customers can reap the benefits of Kickfin with minimal ramp-up upon implementation.

“No two restaurants split tips the same way, but invariably, it takes too long and involves too much risk,”  said Justin Roberts, the co-CEO of Kickfin. “This integration allows for the utmost customization with a near-zero learning curve — truly the best of both worlds for restaurants that want to save time, reduce labor costs and make life easier for their team.”

And one of their partners is already enjoying the ROI with Kickfin. Bar Louie takes great pride in making tip distribution equitable for all of their employees, so they rely on a complex tip pooling system to ensure fair pay. Prior to using Kickfin, managers at each of their 60 locations spent 45 minutes at the end of every shift to make calculations and divvy out funds to all of their servers. Now, they’ve streamlined their tip-out process with Kickfin — and managers are doing the same work in less than a minute! That’s an annual average of 15,000 hours saved across their entire chain. 

>> Hear more Kickfin success stories

After implementing Kickfin, managers can spend their time on what matters most: delivering excellent customer service. That means more table touches, more support for your staff, and more time to focus on server training. 

With managers spending more time on the floor (instead of counting cash in the back), you’ll see better customer reviews, better service, and increased sales — all from digitizing your tip-outs with Kickfin.

We’re excited about our new partnership with Toast and the opportunity to make digital tipping a reality for their customers. For restaurants who aren’t using Toast, don’t worry! We look forward to providing similar integrations across the restaurant tech industry.  

Want to see these results for yourself? Find out how to become a Kickfin integration partner or check out a demo of our platform.

No growing pains here! 

We’re thrilled to announce that Inc. listed Kickfin in their list of the top 10 fastest growing companies in the Southwest. (In fact, we earned the #1 spot in the software category and were listed as #9 overall!) We’re honored to be included alongside innovative companies that are making a big difference in our region. 

Inc. measured Kickfin’s growth from 2020 to 2022 — which wasn’t an easy time for the restaurant industry, to say the least. In spite of the challenges posed by the pandemic, restaurant concepts across the country embraced Kickfin’s technology. 

As a group, the 2024 Inc. honorees averaged 136% growth and created 17,606 new jobs over a two-year period. Individually, Kickfin grew by a whopping 1,304% (yes, really!).

We want to recognize and thank both our amazing customers and the Kickfin team for being part of our success story and allowing us to be a part of theirs. 

Our Customers

For years, restaurants manually calculated and paid out cash tips — despite the increasing hassle and liability those old-school methods entail. It’s not because operators are tech-averse; there simply wasn’t a good way to automate the process that didn’t create new friction or require new workarounds. 

That’s precisely why we developed Kickfin. Of course, we’re proud of what we built and the team behind it (more on that below). But we owe a great deal of our success to the customers who trusted us enough to give Kickfin a shot — especially those early adopters who are now some of our longest-standing customers.

There’s a leap of faith involved when you partner with a vendor and layer in new technology, particularly when it impacts something as important and sensitive as how you pay your people.  We don’t take that lightly, and we are incredibly grateful for the opportunity to serve each and every customer who’s been on this journey with us.

>> Hear from our customers about their experiences with Kickfin

Our Team 

Every person on our team wholeheartedly believes in our mission and vision for the future. In short: we’re here to make the tip management process insanely easy for everyone so that paying out your people is (almost!) as great as getting paid. 

As backstory: Our co-founders, Brian and Justin, came up with the idea for Kickfin while dining out together and noticing that an armored car was dropping off cash. They asked why a restaurant would need a cash delivery when most patrons pay by card; the manager explained the cash was needed to pay out tips at the end of the shift. The inefficiency (and expense, and risk…) of that process was a lightbulb moment for Brian and Justin.

They set out to build a team who not only understood the problem, but could think critically and creatively about a solution — and bring it to life. 

From sales and marketing to product and support, every Kickfin employee has had a hand in the growth and success of our company, thanks to their passion for our purpose and their commitment to being best in class.

We’re proud of what we’ve achieved thus far, and we’re excited to continue collaborating with our customers, innovating on their behalf, and taking Kickfin to the next level together. Onward and upward!

See Kickfin in action!