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Level 1

How to take tips out of liability account and put into owners draw

I'm a sole proprietor with two employees.  When a customer gives a tip to my employees, I put the tip into a liability account and then pay it out with their paycheck.  I still work in the business and received tips as well.  My pay comes out of the business as owners draw.  How do I take my tip out of my tips liability account and pay out to owners draw and keep everything balanced? Or should I not put my tips into a liability account at all?
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Best answer December 10, 2018

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Level 15

How to take tips out of liability account and put into owners draw

journal entry

debit tips liability
credit owner equity or better owner equity investment

then take cash or check for that amount and use owners equity draw as the expense for the check/cash

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5 Comments
Highlighted
Level 15

How to take tips out of liability account and put into owners draw

journal entry

debit tips liability
credit owner equity or better owner equity investment

then take cash or check for that amount and use owners equity draw as the expense for the check/cash

View solution in original post

Highlighted
Level 1

How to take tips out of liability account and put into owners draw

Thank you.  I had a mental block and couldnt get passed crediting owners equity.
Highlighted
Level 15

How to take tips out of liability account and put into owners draw

"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.

Highlighted
Level 15

How to take tips out of liability account and put into owners draw

"How do I take my tip out of my tips liability account and pay out to owners draw"

"debit tips liability
credit owner equity or better owner equity investment"

That doesn't seem right. Sorry.

For the Sole Proprietor, tips to you are Income. Don't put them into Liability, to start with.

You can take a draw any time you want to.
Highlighted
Level 1

How to take tips out of liability account and put into owners draw

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?

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