Understanding Cash Tips vs. Credit Card Tips

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Cash-only businesses are becoming less and less prominent, but cash tips remain quite common in restaurants, salons, hotels, and many other industries. When tips can be left with credit cards, debit cards, or in cash, understanding exactly how different tip methods affect businesses and employees is important. There are advantages and disadvantages to each, but ultimately all businesses which accept tips should be prepared to handle all customer tip methods.

With all of this in mind, today we will discuss the differences and similarities when it comes to accepting cash tips and credit card tips, review tip management from the perspective of an employer, and how to fairly pay credit card tips to employees.

Tip Management for Employers

Tip Management for Employers

Managing employee tips can be difficult to navigate regardless of the tip method. There are several areas in which employees can feel slighted or downright cheated when it comes to tip distribution. Here are two common disputes which can arise in tip-based industries with some advice on how to handle each situation.

Should tip be shared or kept by the individual who received the tip?

Anyone who has ever earned a living through tips is likely familiar with this discussion. On one hand, pooling tips incentivize a team mentality and can enhance the customer experience. On the other hand, tipping an individual for a job well done incentivizes each employee to work their hardest to earn fair pay. It is vital that employers understand when tip pooling is legal and when it may be breaking the law. Be sure to research state laws that may impact your business and always consider the personal impact such a policy might have on your staff.

Make it easy for employees to collect and report their tips

Another huge issue when it comes to cash and credit card tips comes down to accurate collection and reporting. Using a high-quality POS system is a great way to ensure that employees can quickly and easily report received tips. This can be done for both cash and credit/debit card tips. The fringe benefit here is that employees can see an easy-to-read report of their tip earnings at any time. Failure to accurately report tips as an employer or employee could result in IRS audits and penalties down the line.

Cash Tips vs. Credit Card Tips in a Nutshell

Cash Tips vs. Credit Card Tips in a Nutshell

In many ways, money is money. Cash tips are worth exactly the same as credit card tips. Yet there are a few practical matters which must be taken into account when dealing with these two methods of tip collection, including:

Credit card tips must be entered accurately. Cash tips are simple — the customer leaves cash in a check, in a jar, or in your hand. The amount that they give is the amount that you receive. Credit card tips must be entered into a POS or other payment processing system accurately or the customer will be mischarged.

Credit card receipts must be saved. Along those lines, a cash tip is a closed case. Once the transaction is over, so too is your responsibility to the customer. For credit card tips, businesses are generally liable for keeping signed credit card receipts for at least 18 months as insurance against chargeback claims.

It is more difficult to track and report cash tips. Despite the legal concerns, the reality is that employees are more likely to pocket cash tips without reporting them accurately. Encourage your employees to use your payment processing software to track credit card and cash tips for greater accuracy.

Paying Credit Card Tips to Employees

Paying Credit Card Tips to Employees

There is one major topic when it comes to paying employees credit card payments which we have not yet discussed: withholding credit card processing fees. Interchange fees charged by credit card companies and by merchant providers may both be deducted from an employee’s tips. However, there are certain guidelines to make this practice legal:

  • Processing fees may only be deducted from the gratuity portion of the bill, not the entirety of the processing fees incurred by the business.

  • Each state has its own laws regarding tip payment. California, Massachusetts, and Maine, all prohibit this type of tip deduction.

  • Processing fees may only be legally deducted if the employee will still be earning minimum wage after the deduction.

Businesses can certainly manage this by using the practice of processing fee deduction. The question then becomes whether this practice is worth potentially irritating your employees and/or the potential risks of breaking the law whether or not it is intentional. There is no right or wrong answer to this question, but employees would be wise to consider all factors in the equation.

True Merchant Helps Employers and Employees with Tip Management

True Merchant is proud to offer payment processing solutions that are simple, secure, and supported by a qualified team of industry professionals. Our products range from online payment solutions, credit card machines, mobile credit card machines, and of course payment processing.

At True Merchant, we understand that choosing a payment processing service is not what most business owners look forward to. It can be daunting, confusing, and it isn’t the most thrilling part of operating a business. However, working with a well-established payment processor will allow your business to meet customer expectations for convenience, stay protected from fraudulent activity, and avoid costly fees.

This is a very important decision for any business. Contact True Merchant today to learn about how our payment processing services can help your business reach the next level!