QuickBooks Small Business

Accounting & Payroll Issues for Restaurant Tips and Service Charges—Part 2

2) Credit card tips not paid in cash

Restaurants can choose to pay the credit card tips in cash or pay them with the next regularly scheduled payroll. The setup for running the unpaid tips through payroll is similar to what is described above, with one small — but important — difference. If the employee has not been paid for the credit card tips, don’t use the Tips Deduction item in QuickBooks Desktop or the Cash Tips item in QuickBooks Online. This ensures that the amount of tips reported will be paid out to the server.

In the case of QuickBooks Online, select “Paycheck Tips” as the additional pay type so the unpaid tips are added to the paycheck:

Paycheck Tips

It is also possible to have a hybrid scenario where cash tips are kept by the servers and credit card tips are included in payroll. In this case, two different Tips payroll items are required. One to report the tips the employee already received and another to report what needs to be added to the paycheck. When using an outside payroll processing provider, make sure there are options to add unpaid tips to paychecks and to tax tips the employees have already received.

Service Charges

As discussed in part one of this series, automatic gratuities are not considered tips for accounting and payroll purposes. They are income to the restaurant. If the restaurant chooses to pay any or all of the service charges to the employees, they are considered wages. The only special treatment for payroll is to make sure you add them as a regular pay item and tax them the same as their normal hourly wages. In many payroll processing systems, this can be done by adding a separate wage item to track Service Charges. It is important to understand that service charges are not eligible for the employer tax credit on reported tips, discussed below.

Accounting for Payroll

The easiest way to manage the accounting for payroll is to use a native payroll program inside the accounting software that is mapped to the correct accounts. Restaurant Accounting with QuickBooks describes in detail how to track payroll taxes, tips paid, wages paid to Chefs, Servers, Hosts, Bussers, Bartenders, etc. in QuickBooks Desktop.

QuickBooks Online does not allow you to map different wage items to different expense accounts. However, depending on the level of detail desired on your Income Statement, journal entries can be entered to move gross pay from one wage account to another.

Outside payroll processing providers will often include a way for you to automate the payroll entries into your accounting system. Some providers do this with journal entries that can be easily imported, with an API (application programming interface), or by making reports available that provide all the information needed to enter the payroll into your accounting system manually. It is important to understand what the payroll entries should look like so the integration or manual entry is done correctly.

Let’s focus on the case of an outside payroll service provider. They will tax the tips already received, pay tips not previously paid out, issue paychecks and direct deposits to the employees, pay the tax liabilities, and pull the money out of the restaurant bank account to do it.Payroll entries will include net paycheck amounts paid to employees and payroll taxes paid to the government. To best explain how this all works, let’s look at some real numbers. Consider these assumptions:

Employee Assumptions

Employer Assumptions

The payroll service deducts $9,271.50 from the restaurant bank account for the employee direct deposits. Notice that the employee is taxed on both the cash (tips already paid) and credit card tips (tips NOT already paid). The net pay includes only the credit card tips not previously paid out in cash and does not include the cash tips that the employees have already pocketed. The payroll service will also deduct $4,517 for employee and employer payroll taxes.

To record the payroll, prepare one journal entry as follows:

Payroll Journal Entry

If payroll checks are issued to employees instead of, or in addition to, direct deposit payments, the Net Pay credit to the checking account is entered via individual checks posted to each employee. This ensures the bank reconciliation will reflect cleared and uncleared checks. Set up a Net Pay Clearing expense account and post the individual checks to that account. When the journal entry above is posted, substitute the line for Checking Account (net pay) to be a credit to Net Pay Clearing instead. When all paychecks are entered, the Net Pay Clearing will be zero. Any service charges paid are included in Gross Wages when recording the journal entry.

Something to note is that the amount of tips the employees earned will NEVER be reflected on the restaurant’s books. Accountants and bookkeepers usually balance total wages on the W-2 forms to total Gross Pay Expense. This cannot be done based on Box 1 Wages, Tips, Other Compensation because tips are not an expense of the business. This confuses even the smartest of accountants and bookkeepers. Total tips paid must be deducted from W-2 Box 1 Wages when reconciling to Gross Pay Expense.


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About the author

Stacey Byrne

Stacey Byrne (@SLByrneCPA) is a practicing CPA with 25 years' experience consulting with a variety of small to medium-sized businesses including restaurants, construction companies, law firms, and not-for-profit organizations. She is the co-author of Restaurant Accounting with QuickBooks, with Doug Sleeter. Stacey has worked as a staff accountant at the Iacopi, Lenz & Co. CPA firm, and is the former director of finance for a management company where she oversaw accounting and payroll for multiple facilities, including a sports/entertainment arena, theater, ice rink, and ballpark. She is a former adjunct professor of QuickBooks at San Joaquin Delta College in Stockton, California.

Stacey holds several Intuit certifications in QuickBooks (Advanced Desktop, Advanced Online, and Enterprise). She is a certified Sleeter Group QuickBooks consultant and a certified Xero Partner.

Stacey holds a B.S.B.A. degree in Accounting from California State University, Stanislaus, and is currently in pursuit of her M.S. Ed. degree in Online Teaching and Learning at California State University, East Bay. She is also a member of several professional organizations, including the California CPA Society, Sleeter Group Consultants Network, and the Woodard Network.

When she is not writing, working with clients, or studying, you will likely find Stacey at a San Francisco Giants game or enjoying family time with her two sons.

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