Bookkeeping · Daily Workflows · Brief · Working level
Recording tips and gratuities in hospitality books
Tips are the employees' money passing through your hands — a liability from the card terminal to the payroll run. The entries at collection and payout, and where tips do and don't touch your P&L.
Tips are not your revenue. From the moment a customer adds 20% at the card terminal, that money belongs to the server; your business is a courier holding it between the terminal and payday. The bookkeeping follows: card tips land in a liability account — tips payable — and leave it when paid out through payroll. The only P&L lines the tip cycle creates for the business are payroll taxes on tips and, if you absorb them, the card-processing fees on the tip portion.
The entry at the daily close
A night's card batch: $5,000 of food and beverage sales plus $900 of card tips.
| Account | Debit | Credit |
|---|---|---|
| Processor clearing account | 5,900 | |
| Food & beverage sales | 5,000 | |
| Tips payable (liability) | 900 |
Sales tax collected would be a third credit line to its own liability. The processor payout days later is a transfer from clearing to checking, not new income.
The liability account across a week of service and one payroll:
Tips payable
| Debit | Credit |
|---|---|
| Paid out via Friday payroll4,150 | Mon–Thu card tips2,480 |
| Fri–Sun card tips1,670 |
The balance at any moment is tips collected but not yet paid to staff. It should clear to near zero every pay cycle.
Cash tips taken home nightly never enter this account — they go straight from customer to employee. They still exist for tax purposes: employees report them, and payroll withholds on them (see below).
The payout through payroll
When payroll runs, tips previously collected are released:
| Account | Debit | Credit |
|---|---|---|
| Tips payable | 4,150 | |
| Cash — operating checking | 4,150 |
No wage-expense debit for the tips themselves — that would double-count money that was never yours. The payroll service typically nets withholding across wages and tips in the same run.
The business does have real tip-driven expenses: the employer share of Social Security and Medicare on reported tips (debit payroll tax expense, credit payroll taxes payable), and reported tips ride through withholding on the employee side. The employer mechanics live in Publication 15, and the quarterly totals reconcile onto Form 941. Food and beverage employers may also be entitled to the FICA tip credit on the employer taxes paid on tips above the minimum-wage floor — a tax-return item worth flagging to your preparer, funded entirely by books that track tips cleanly.
Keeping the account honest
- Reconcile tips payable to the POS tip report weekly; the balance should equal tips collected since the last payout.
- Clear the account every pay cycle — a growing balance is staff money you are sitting on, and states regulate how fast it must reach them.
- Match processor payouts as transfers from the clearing account, never as income, or tip-inclusive deposits will overstate sales.
- Document your tip-pooling policy in writing; the ledger should mirror the policy, and wage-and-hour rules on pooling come from the Department of Labor, not the tax code.
The pattern — collect as liability, disburse to the true owner — is the same one behind customer deposits and gift cards: money in your account is not automatically money that is yours.
Frequently asked questions
- Are customer tips revenue to the restaurant?
- No. Tips belong to the employees; the business is a custodian. Card tips collected at the terminal are recorded as a liability — tips payable — and cleared when paid out through payroll or cash-out. Only mandatory service charges the business imposes and keeps are business revenue, and those are not tips at all.
- What is the journal entry for credit card tips?
- At the daily sales close: debit cash (or the processor clearing account) for the full amount collected, credit sales for the food and beverage portion, and credit tips payable for the tip portion. When tips are paid out through payroll, debit tips payable and credit cash — clearing the liability, not creating an expense.
- Do tips go through payroll and payroll taxes?
- Yes. Employees must report tips, and the employer withholds income tax and the employee share of Social Security and Medicare on reported tips, and pays the employer share. Tips flow through the payroll system for tax purposes even though they are the employees' money. Publication 15 covers the employer's obligations.