"So
in order to keep the tips separate from sales, just create an income
category for tips? Add my tips as income (tips to be specific) and my
employees tips go into liability?"
Here is the difference:
When your staff gets tipped, that is reportable as taxable income for them. It didn't come from you and is not your expense, so the tips also are not your income.
Now, with the new 1099-K rules, a lot of people ARE doing this differently. Because, for a Credit Card Driven business with lots of tips (restaurant and bar, for example), the Credit Card provider is reporting a HUGE amount on 1099-K. That means the tips would appear to be "missing" if not tracked as Income. So, in this example, we track Everything as income, and the tips Out are expense. It just means you didn't really Fund those tips; you collected from customers.
Okay, now let's just look at me: I work alone as your consultant. You overpay me, because you love my work :) That is my "tip" but really, just income to me = more income than what I charged you. This example also is You, the sole proprietor.
If you want Your Tips to go into a separate income account, that is fine; that is up to you. The IRS won't ask you to do this. Income is Income, for this example. You do not report your Tips separately; you don't get a W2 with the breakdown. You won't be reporting to the IRS with any breakdown. Your tips are business income as sales, really.
