A Case for capturing Tip-Outs

By John Marshall

The capture and recording of tips outs can provide an employer with a number of valuable benefits, the foremost increased tip program compliance numbers and a larger Tip Credit. Primary is the tracking of funds provided to indirectly tipped employees by their directly tipped counterparts. This ensures accurate disclosure, receipt and declaration by the recipient, as well as the equal and opposite reduction of taxable wages for the contributor. The establishment typically benefits from an increase in overall declared tips as a result. This is due in part to the full recording of tip-out funds, and an added incentive for directly tipped employees to fully declare all their cash tips, now that they no longer need to reduce declared tips by the value of their tip-outs. These reallocations of tip-out funds are typically applied to the total tip declarations of each employee.   A tip-out collection and reporting envelope format is provided under TOOLS, courtesy of GrataSoft Solutions to assist in the floor operations of this process. This envelope provides signature proof backup of contributor amounts and recipient receipt, as well as permission to declare amounts as tip.

Tip-outs can often account for 15% of an establishments total tips.  When an operator declaring 12% tips captures all unreported tip-outs, the house rate can jump to 15% (a 25% increase).  This can be a zero-cost change when electing the Social Security Tip Credit.

Recent increases in State minimum wage levels have opened up new employer vulnerabilities in the form of wage & hour violations.  When paying a cash wage below minimum wage, it is essential that declared tips make up the shortfall.  In many instances, indirectly tipped employees do not accurately declare all their tips (if any at all).  This can lead to minimum wage shortfalls.  Such shortfalls can cause the entire tip credit mechanism to fail, resulting in the employer being required to make up the entire difference between cash wages and minimum wages for all employees!  Many lawyers have jumped on this bandwagon and turned such issues into class actions. Bottom line - track and capture tip-outs, you'll be glad you did.

If you are considering or participating in the ATIP program, the capturing of tip-outs can be beneficial in setting attribution percentages between staff using historical data, and maintaining their accuracy through time.  In the case of the Gratasoft product, and tip-out that is not captured in the ATIP definitions can be used to adjust attributions, making attributed rates even more accurate and equitable.

If your establishment is required to ‘allocate tips’ (see the IRS 8027 Demystified), the complete capture and declaration of tip-outs could greatly reduce the amount of tip shortfall or even eliminate the need to allocate tips at all.  As prescribed in the IRS procedure for allocating tips, any tip shortfall is reduced by the establishment's tip-outs before being allocated to the staff.  If tip-out declarations are only observed by certain staff, tip pool allocation could create potential inequities by spreading tips unevenly if there are not policies in place that define and monitor tip-out guidelines.  Initiating a tip-out capturing and recording system will not only help to correct this pitfall, it may eliminate the cause entirely.

GrataSoft Solutions offers software packages for automation of complete tip-out tracking and reporting systems, as well as integration with POS and payroll systems. Please see GrataSoft.com for more information.