When paying for your bill at a restaurant, bar or cafe, it’s customary to provide a gratuity. But is it better to pay the tip in cash or add it to your credit card receipt?
Lisa Mirza Grotts , an etiquette expert of 23 years, said, “When in doubt, cash it out. It’s direct and prompt. This way your tip will go straight to those who earned it, no strings attached. Further, cash is immediate whereas credit card processing fees might delay things.”
Fees and Deductions That May Apply to Credit Card Tips
Some restaurants don’t just pass credit card fees on to customers — some also might pass them on to their employees.
Mary King, a former restaurant manager, restaurant analyst and editor at The Restaurant HQ , said that in some states, restaurants and bars can legally take credit card processing fees out of credit card tips.
“This is typically about 3% to 4% of the tip, which can add up if the majority of the worker’s tips are on credit and debit cards,” she explained. “Even in states where this is technically legal, I have rarely seen restaurant owners enforce this, though; doing it correctly requires administrative work that a lot of restaurant owners don’t have.”
You might think that if you leave cash for the waitperson, they’ll be able to pocket the tip immediately. Although that’s true in some instances, in others, that might not happen.
“In some restaurants, tipped staff can take their cash tips home at the end of the shift, so cash tips can equal immediate money,” said King.
However, she explained that some restaurants that pool tips require tipped staff to turn cash tips over to the tip pool. Though, even with a tip pool, cash tips can be allocated separately from credit card tips and distributed to the pool on the day they are collected, King noted.
But that doesn’t mean every single restaurant, bar or cafe will do so.
How the Tip Method Impacts Tip Distributions
According to King, cash and credit card tips are treated the same in tip pools or tip-out situations.
“Virtually every restaurant that requires tip sharing as a condition of employment treats the distribution of cash and credit card tips exactly the same,” she explained. “The only difference may be if the restaurant allows cash tips to be distributed and collected the day they are received or requires that cash tips get deposited in the bank and appear on tipped employees’ checks.”
Tax Implications for Workers Who Receive More Tips in Cash
“The only tax implication for workers who receive more cash versus credit card tips happens because of underreporting,” said King. “Cash has legs, as they say, and cash tips are easier to hide. So long as a tipped employee claims around 7% to 10% of their sales as tipped income, most tax authorities don’t look too closely.
“But if a tipped employee is suspected of under-reporting tips, they could get audited, which can be an enormous headache. I’ve seen servers get audited, and it is absolutely not worth it. If the underreporting is rampant, the restaurant itself can get audited and penalized by state and federal tax authorities. Since tips are taxed as wages, a restaurant whose staff underreports tips is also underpaying on payroll tax.
“Underreporting tips is absolutely not worth the headache. Owners and managers should make it easy for their staff to report their tips, do a spot audit once a month or once a quarter to see if the reported numbers make sense, and check in with any staff they think might be underreporting tips. The potential negatives for the staff and the business are too important to ignore underreporting.”
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