Tip pooling can feel like one of those “I’ll figure it out later” topics—until you’re faced with an IRS audit or a frustrated employee. The rules aren’t just for big restaurants; they apply to any business where tips are part of the paycheck.
From cafés to salons, the Department of Labor and IRS have specific guidelines on who can share in tips, what counts as a tip versus a service charge, and when managers can (and can’t) participate. Knowing the difference isn’t just about compliance—it’s about protecting your business and your team.
A “true tip” is simple: it’s a voluntary payment from a customer to an employee for great service. To qualify, it must:
Be given freely by the customer
Be an amount the customer chooses
Not be negotiated or set by the employer
If it doesn’t meet these standards, it may be considered a service charge—which the IRS treats very differently.
Under IRS rules, service charges—such as automatic gratuities for large parties or mandatory event fees—are not considered tips. These amounts are part of the business’s gross receipts, which means the employer can retain them or distribute them as wages. They must be reported as regular wages, subject to withholding.
Quick Reference:
|
Payment Type |
Can Employer Keep? |
Tax Treatment |
|
True Tip |
No |
Reported as tips by employee |
|
Service Charge |
Yes |
Treated as wages |
Under federal law, only employees who regularly receive tips—such as servers, bartenders, or salon stylists—can participate in a mandatory tip pool.
Managers and supervisors are generally excluded, even if they perform tip-eligible work, unless they spend a substantial amount of time (more than 20%) directly serving customers.
For employees who work in both tipped and non-tipped roles (for example, a server who also works as a host), employers must ensure tips are only shared based on the hours worked in the tipped role.
Shift leads who have some supervisory duties may still participate in tip pools if they primarily perform the same tip-eligible work as their coworkers.
To avoid payroll tax issues, disputes, and penalties:
Keep clear records of all tip pooling arrangements
Communicate policies to employees in writing
Separate tips from service charges in your point-of-sale system
Stay updated on both federal and state-specific tip laws
Tip pooling can be a fair and effective way to share earnings among employees—if it’s done correctly. By understanding the rules, you can keep your business compliant and maintain trust with your team.