What You Need to Know About Restaurant Tip Management

Last updated on March 8, 2023.

Tipping has been a restaurant practice for as long as most of us can remember. They’re as connected as peanut butter and jelly, Chicago and deep-dish pizza, or Julia Child and French Cuisine. Restaurants, particularly those in the United States, often offer guests the opportunity to give an additional amount on top of their check total as a “thank you” for an exceptional experience, which can range from great food to unforgettable customer service. 

Traditionally, these tips are distributed to certain employees in the restaurant based on their roles. Most often, tips are distributed to front-of-house (FOH) workers, such as wait staff and bartenders, as these employees have the most facetime with guests. However, restaurants in recent years have been rethinking this process as they begin to see the inequities baked into the tipping system. Many are starting to focus on improving wage parity between their front-of-house and back-of-house staff through things like kitchen appreciation fees.

Let’s dive into what restaurants need to know when it comes to tip management, from suggested tip request best practices and minimum wage to credits and pooling.

What is the most common way to collect tips?

While providing an open tip line for guests can seem like a great option, as it puts the guest in control, a best practice for restaurant tips is to provide suggested tip percentages. This provides set guidelines for guests to act on and also ensures your staff is being compensated fairly for the service they are delivering to each guest.

If a guest is paying on a Toast point of sale (POS) system, this experience would include tapping or dipping their credit card and then signing the screen. Above the signature bar, your restaurant can display suggested tip amounts. Digital and printed receipts can show suggested tip amounts for guests to help ensure that your waitstaff is being paid for their service.

You can choose to suggest tips based on percentages, dollar values, or a mix of the two. For example, if you operate a fine dining restaurant, you would likely choose to suggest tip percentages of 15%, 20%, and 25%. However, a coffee shop or cafe with significantly smaller check totals and a lower-lift service model may choose to suggest dollar values of $1, $3, or $5.

Ultimately, it’s up to you what suggested tip amounts best suit your restaurant. It’s important to consider your staff compensation while also balancing the ask of your guests — especially in the age of tip fatigue.

What is a tipped minimum wage?

Some states across the U.S. also have their own laws regarding tipped employees. Tipped employees’ compensation generally includes a base hourly wage supplemented by tips. Generally, employers must pay tipped employees a minimum cash wage that is lower than the actual minimum wage, and the tips a tipped employee receives can be credited toward the minimum wage. Here are a couple of items to consider when looking at minimum wage for tipped employees:

• Minimum wage regulations for tipped employees vary by state (and sometimes local) jurisdictions. It’s important to stay up-to-date on regulations for your restaurant. As a result, restaurants need to understand the wage and hour regulations that may affect them.
• The U.S. Department of Labor provides a table of minimum hourly wages for tipped employees, by state, to assist employers. However, it is always a good idea to check with a local labor office or trusted advisor before implementing compensation structures.
• A minimum wage rate must conform to all applicable minimum wage regulations (federal,/ state, and /local) for every hour worked. Some states or localities have a higher minimum wage than the federal minimum wage. As of February 2023, the federal minimum wage set by the Fair Labor Standards Act (FLSA) is $7.25 per hour. So, if a business was subject to federal minimum wage regulations and sought to claim a tip credit against the minimum wage , the business would be responsible for ensuring that if the employee’s earned tips, coupled with a minimum cash wage, did not equal at least the applicable minimum wage(s) (e.g., $7.25) for all hours worked, then the employer would compensate the employee with the difference owed (e.g., if the employee was paid a minimum cash wage of $2.13/hr and only made $2 in tips/hr, then the employer would make up the difference between $4.13/hr and the $7.25/hr [$7.25-($2+2.13)=$3.12]).  

What is the tip credit? 

Two components make up the minimum wage for tipped employees: a cash wage and a tip credit. Depending on the jurisdiction, an employer may be able to claim a tip credit against the difference between the applicable minimum wage and cash wage. 

In simple terms: Minimum Wage - Cash Wage = Tip Credit

Tip credits are generally calculated based on an hourly rate for a particular workweek. States may set a maximum tip credit that may apply to the respective state’s minimum wage, but the federal max tip credit is $5.12 per hour, as of March 2023. This is calculated by taking the $7.25 minimum wage and subtracting the $2.13 minimum cash wage.

According to the U.S. Department of Labor, “The employer who elects to use the tip credit provision must inform the employee in advance and must be able to show that the employee receives at least the applicable minimum wage when direct wages and the tip credit allowance are combined.”

As always, be sure to consult with legal, accounting, tax, or other professional advisors to ensure compliance with local and federal regulations.

What is a tip pool? Should my restaurant use tip pooling?

Collecting tips from guests is only one piece of the equation in restaurants. The next piece to figure out as a restaurant owner is how you want to distribute the tips back to the employees. There are three common ways to distribute tips back to employees:

Tipped employee keeps their tips

This one is as simple as it sounds: whatever tips the employee makes during their shift, they get to keep.

Tip pooling

In a tip pool, tipped employees group their tips and split them, usually evenly, at the end of a certain time frame. It’s important to note that back-of-house employees, such as cooks and dishwashers, may only participate in a tip pool under certain conditions (e.g. in some cases, if the employer does not take a tip credit). If you do take a tip credit for wait staff and bartenders, you may not require those employees to share their tips with non-tipped workers. There are also certain state laws that add additional constraints to tip pools. For example, as of March 2023, tip pooling laws in Massachusetts forbid owners and employees with managerial responsibility from sharing in tips.

Tip sharing

Tip sharing is similar to tip pooling. However, with tip sharing, a group of tipped employees contributes a portion of their tips to non-tipped employees. This is most common in full-service restaurants where servers have a support team, such as bussers and food runners or bartenders who have barbacks. With tip sharing, tips are doled out using percentages that vary based on position. For example, servers may keep 70% of their tips while the remaining 30% is shared with their bussers and food runners.

What is tipping out?

When tipped employees are paying a portion of their tips to other employees on their team — such as in tip sharing — this is considered tipping out. Tipping out can be voluntary or mandated as part of a tip sharing or tip pooling agreement.

What is tip management software?

Managing tips across your team can quickly become a time-consuming and confusing process. Implementing modern tip management software for your restaurant can give you peace of mind. You’ll know your tip policies are being systematically followed, saving you and your employees the time and hassle of performing manual calculations. Some popular tip management tools include Kickfin, 7shifts, Tip Haus, and Toast Tips Manager.

How does tip management software help your employees?

While it seems like a tip management solution would primarily benefit a management team, that’s beginning to change. Today’s solutions give employees the reporting they need to see how their tips were distributed and may even allow them the ability to receive tips before the next regularly scheduled payday. This gives employees better access to their earnings and more confidence that their tips are distributed appropriately.

How does tip management software make it easier to run payroll?

With tip management software, you’ll be looking at improved efficiency in your payroll process, less time spent on payroll each pay period, and a wide range of reporting functionalities to help you make sense of your data. When using a tip manager like Toast, you’ll also have the benefit of full integration between your point of sale (POS) system, Tips Manager, and Payroll and Team Management tools.

Features to look for in a tip management software

Relative percentage by job rules

An important consideration is to ensure the software you’re looking for can accommodate a tip-out method where employees receive a tip pool distribution based on their job role, as configured in the POS.

Let’s walk through an example. Two bartenders working on a busy Friday night collect $500 in tips. At the end of the night, they need to tip out each other and the barbacks that assisted with orders.

This particular restaurant tips barbacks at 10% and the remaining amount is split between the bartenders. This means that the relative tip percentage is 10% for the barback job and 90% for the bartender job.

This calculation would look like this:

$500 * 10% = $50 / 2 barbacks = $25 / barback

$450 / 2 bartenders = $225 / bartender

Choosing tip management software that does this automatically saves your team the time and hassle of manual calculations — plus, there’s no room for human error.

Sales category rules

Another important consideration is to ensure the software solution can also accommodate a tip-out method where employees receive a tip distribution based on defined sales categories, as configured in the POS. This is traditionally used for bartender or server positions where there is an opportunity to upsell guests on food or drink items.

Shift & day tip period

Another aspect of managing tip pools is considering how to pool tips according to time or frequency. A tip management solution can offer the opportunity to pool and distribute tips based on shift or by workday, which varies depending on operational models.

A workday distribution structure allows employers the ability to tip out more evenly across an entire team no matter the shift employees worked, avoiding fluctuations like dinner rushes.

Real-time calculations

One of the biggest advantages of a tip management solution is that employers no longer need to worry about exporting information into a custom spreadsheet. Instead, employers can see real-time pooled tips with ease. This means the built-out rules take the information from the POS and translate them into tip-out reporting, both on an employee and job level.

Credit card and cash tip transmission    

An important aspect of tip pooling is the ability to pool and distribute different types of tips received throughout the restaurant. 

Cash and credit card tips are variable amounts that are determined by the guest on each check, whereas service charges are totals that are automatically applied to checks based on parameters determined by the restaurant. A common example of a service charge would be when an 18% tip is automatically applied for a party size greater than 10 guests. Note that the term “gratuity” may have different definitions depending on whether it’s being used in the federal context or in a particular state or local jurisdiction’s context, since different regulatory bodies may each define the term in a different way.

An automated tip pooling solution allows employers the ability to manage each of these tip types independently, while still implementing the various rules previously mentioned. This gives employers more flexibility to manage tips across their teams and eliminates the complex and time-consuming process of updating spreadsheets based on POS sales report information.

Employee and job tip reporting

Once all tip management rules are built and define how each tip type should be pooled and distributed, the tip pooling system will take it from there! A good system should allow employers the ability to view tip-outs on an employee-by-employee basis or by job type. 

This helps ensure that employers can quickly verify and approve tips across employees each week and also understand how evenly tips are distributed across an entire team.

Implement tip management software for your restaurant

Managing restaurant tips can be a very complex process, taking you away from what you love most: serving your team and your guests. This is why it’s important to remember the following things when thinking about tip pooling and identifying a tip management solution:

Define how you want to collect tips

At this point, you likely know if tips are going to be a part of your operational model or not. But understanding whether to set up an open tip or gratuity policy is crucial to determining how much employees will earn in tipped wages.

Define your tip-out policy

Whether it’s based on job type, sales category, or both, it’s completely up to you and the feedback you get from your team. The increased volume of digital or online ordering in the restaurant industry has changed how restaurants think about managing tips, so it’s worth evaluating your tip-out policy.

Find a tip management solution to automate and ensure efficiency

As we all know, there’s seldom enough time to complete all of the daily tasks in a restaurant. Managing tips can be one of the most time-consuming parts of each shift, especially when a calculation isn’t done properly. Find a solution that helps take this burden off your plate, allowing you to focus on the rest of your business.

Toast Tips Manager makes it that much easier to distribute tips to the hardworking employees who earned them. A fully-integrated tip management solution built for restaurants, save time by integrating pooled tips from Toast POS with Toast Payroll & Team Management.

Already a Toast customer? Get Toast Tips Manager here.