We are a restaurant. I've had to withdraw money to pay server credit card tips at the end of the evening but do not know how to reconcile where that money went.

Hi there, dmccorm663.

I'd like to share what I know about tracking tips in QuickBooks Online.

To track cash coming out for tips in QuickBooks Online, you'll need to create a liability account first. 

Like this:

1. Go to the the Gear icon.
2. Click New at the top right.
3. Choose Other Current Liabilities in the drop-down list.
4. For the Detail Type, select Other Current Liabilities.
5. Enter the name of the account. For example "Gratuity/Tips".
6. Once done, hit Save.

After that, you can follow these steps to record the tips received by employees in QuickBooks.

Here's how:

1. Click the plus sign at the top and click Check/Cheque.
2. Select the back account to pay the tips from.
3. Choose the employee to pay the tips to.
4. Enter amount and select Gratuity/Tips in Account field.
5. Click Save.

I'm adding this article for more information about paycheck and tips in QuickBooks Online: Cash tips vs paycheck tips.

Get back to me if you still have other questions or clarifications about tips. I'll be here to answer them. Have a nice week!

I have another issue and I hope you can help me. I am having trouble when it comes to recording/paying the gratuities from credit cards payments. We record the gratuities received with credit card payments  on a daily basis to a liability account called “undistributed tips”, but when I run the payroll (which I added paycheck tips under pay types) it records it as wages expense to the company and they are not been taken out of the liability account and not only that but the company also is paying employer taxes on these amounts when we shouldn't have since they are neither the company's income or expense. How can I fix that. Please help. 

Welcome to the QuickBooks Community, sndrroa. Let me discuss how payroll entries in QuickBooks work. Then, to ensure that the Undistributed tips are set up correctly and post to correct account.

QuickBooks Online Payroll automatically creates default accounts where your payroll liabilities and expenses are recorded. However, you can customize and manage your payroll accounting settings to track your payroll transactions.

You may have assigned the wage expense account for your tips. That could be why it wasn't taken out of the liability account. I suggest going to the Payroll settings to confirm the set up and making sure to choose the correct account for the UT.

Here's how:

1. Go to the Gear icon ⚙ and choose Payroll settings.
2. Select the Accounting section and open it if needed.
3. Go to the Wage expenses account and click the pencil icon.
4. Choose Each employee's wages are posted to different types of accounts (ex: salary, contractor, and so on).
5. Choose which account the transaction of the specific payroll item should go to. Then, select Continue.

However, if you're not sure what account to use in tracking your tips, I recommend consulting an accountant for additional assistance to ensure your records are in shipshape. They can offer advice on how to handle the transaction in the program.

Lastly, you may refer to this article to see steps on how you can record and add a tip or gratuity in QBO: Share tips with your team.

Please let me know if you should have any questions about payroll entries or QuickBooks-related topics. I'm always here to help and have a good one, sndrroa.

Hi, and thank you so much for your help, however, it is not working. I did all the steps you recommended but when I go to select the account to map the paycheck gratuities it doesn't give me the option to select the liability account I need, in fact all it gives me is expense accounts. and the option of adding a new account only offers a cost of goods account, an expense account or other expense. 

I need help. thank you so much.

Hi, I have a question about paying tips/gratuities with checks. what happens when it comes to taxes. Do we, as an employer, issue a 1099 at the end of the year to each employee for the tips distributed?

Did you ever get an answer? I'm having the same issue!!!

However, while I agree that paycheck tips should not be counted as part of an employee wage expense, whether the tips are paid in cash at the end of the day or included in paychecks they do need to be tracked, and you are required to pay social security and medicare taxes on that amount. And your 941's need to include all tips as well (which the Quickbooks payroll system does for both cash and paycheck tips).

What I have done to solve the problem is create a contra-expense account called "Employee Tip Wages". At the end of each payroll period I debit the tip liability account and credit the contra-expense account for the amount of tips I paid out in that payroll. Then at least the combination of the two expense accounts sums to an accurate number for the real employee wage expenses we paid (so our P&L is accurate) and the liability account is reduced.

I have been searching the forums for hours and haven't yet found anyone with the expertise to explain the differences in how QuickBooks handles cash and paycheck tips.