Tipping out is a standard practice in the service industry where a primary tipped employee shares a portion of their earned gratuities with colleagues who provided supporting service. This system recognizes the collaborative nature of the dining experience, acknowledging that successful customer interaction depends on a team of workers. This practice ensures that support staff, who do not directly interact with the customer for payment, still receive compensation that reflects the overall business performance and helps maintain fairness within the establishment.
Tipping Out Versus Tip Pooling
Tipping out and tip pooling are both methods of sharing gratuities, but they differ significantly in their fundamental mechanism and control. Tipping out, also known as tip sharing, is a single-direction transfer where the primary server or bartender retains their tips and then personally distributes a percentage to support staff. The server maintains control over their initial earnings and is responsible for calculating and distributing the specified amounts at the end of a shift.
Tip pooling involves a collective process where all tips earned by a group of eligible employees are gathered into one common fund. This pool is then managed by the employer or a designated employee and redistributed among participants based on a predetermined formula, such as hours worked or a points system. The key difference lies in the control of the funds: in pooling, the money is fully surrendered to the pool before redistribution, while in tipping out, the primary earner directly shares a percentage from their individual total.
Roles Involved in Tip Distribution
The employees involved in the tipping out process are categorized into primary earners and support staff, primarily operating in the Front-of-House (FOH). Servers and bartenders are the main earners, as they receive gratuities directly from the customer and are responsible for initiating the tip-out process at the conclusion of their shift.
Support roles are the recipients of the tip-out. These positions include bussers, who clear and reset tables; food runners, who deliver dishes; and barbacks, who assist the bartender with stocking and preparation. Hosts and hostesses are also often included, as their role in managing the flow of customers contributes to the server’s success. Modern regulations increasingly allow the inclusion of Back-of-House (BOH) staff, such as cooks and dishwashers, provided the employer does not take a tip credit against the full minimum wage.
Formulas for Calculating Tip Outs
The calculation of tip-outs is based on one of two primary methods: a percentage of the server’s total sales or a percentage of the total tips earned. The percentage-of-sales method is common because it is verifiable and easily tracked through a point-of-sale system, making it less prone to disputes. Under this method, a server is required to pay out a percentage of their total food and beverage sales, often ranging from 3% to 5% of their total revenue. For instance, a server with $1,000 in total sales might tip out a set percentage broken down by support role, such as 1% to the host and 2% to the busser.
The second method involves calculating the tip-out as a percentage of the server’s total tips earned during the shift. This approach directly links the support staff’s earnings to the amount of gratuity left by customers. A restaurant might mandate that servers tip out a percentage of their total tips, which is then divided among the support team based on their relative contribution. For example, if a server earns $200 in tips, they might tip out $50, with the distribution reflecting the level of effort and responsibility each supporting role provides to the overall service.
Employee and Employer Responsibilities in Distribution
The distribution of tips involves specific responsibilities for both employees and the employer to ensure compliance with labor regulations. The primary responsibility of the employee who receives the tips, typically the server, is to accurately track and distribute the required tip-out amounts to the support staff at the end of their shift. This must be done promptly and according to the established company policy.
The employer has a responsibility to facilitate the process, often by using point-of-sale systems to track sales and tips, which simplifies the server’s calculations. Employers must also ensure that all tipped employees receive at least the full minimum wage, which involves either paying the full rate or utilizing a tip credit to cover the difference between a lower direct wage and the mandated minimum.
Owners, managers, and supervisors are generally prohibited from receiving a share of the employees’ tips, including through a tip-out or tip pool arrangement. This rule applies even if they occasionally perform tipped duties.
Reporting Tips for Tax Purposes
The practice of tipping out directly impacts how employees must report their income for tax purposes. The server, who is the primary earner, is required to report the total amount of tips they initially received (gross tips) to their employer. They then subtract the amount they tipped out to support staff, reporting only the net amount of tips they ultimately retained as their income.
Conversely, employees who receive the tip-out amounts must report those funds as part of their total tip income. This ensures that every dollar of gratuity is tracked and taxed as income. The employer ensures that reported tips are accounted for in payroll to calculate the correct amount of Social Security and Medicare taxes withheld.