What entry should I make to get tips collected into wages expense after it is paid to our employees?

It's good to see you here in the Community space, accounting-healt.

We can create a tips item to ensure that it'll be recorded in the wages expense. I'm here to help you on how to do it.

Here's how:

1. Go to Payroll.
2. Click the Edit payroll items.
3. Select the New payroll item drop-down arrow.
4. Click Pay type and the Select drop-down arrow.
5. Choose Other Earnings. Under Name, you can enter Tips.
6. Select Create.

In case you need different payroll reports to view employee info, wages, taxes, and deductions, you can read this article: Run payroll reports.

If you have additional concerns regarding your tips in QuickBooks Online, please don't hesitate to post them here in the Community. Stay safe!

I appreciate the response. I should've clarified, we do not use QB payroll. We're doing a manual entry to record the payroll done by a payroll service.

Maybe the question I should be asking is whether the tips should appear in wages expense at all. They technically aren't an expense. They're collected from customers, held in the liability account and then paid to employees. Prior to accepting tips, we always ensured that our financial reports showed the same wages and payroll tax reported to the IRS because we heard its an audit flag if they differ. However, in the case of businesses that collect tips, is that necessarily true. My financials would show less of a wage expense than reported, so maybe I'm overthinking this? Again, thanks for your time.

I have this exact same issue/question. I wish Quickbooks would have responded to you! Did you ever figure it out? 

The issue is if you account for the tip under wages it leaves the liability account with a balance. How do we 0 out undistributed tips? I made a sub account "employee tips distriputed" but that still leaves the liability account with a balance.

I appreciate you sharing your queries here in the Community, @Nunesauto.

I'll provide some information about settling the undistributed tips balance in QuickBooks Online Payroll (QBOP).

Accounting for tips under wages can leave a liability balance since tips represent funds owed to employees, and until they are paid out, they remain liabilities. To zero out these undistributed tips we can use journal entry. Here's how:

1. Click on + New.
2. Choose Journal Entry.
3. For the first entry, pick an account from the Account field. Enter the amount as either a debit or credit, depending on your needs.
4. For the next entry, select the account you want to move money to or from. Enter the same amount in the opposite column (credit or debit) as you did in the first line.
5. Ensure the amounts match, with one line having the amount in the Credit column and the other in the Debit column, ensuring balanced accounts.
6. Add a note in the memo section indicating the purpose of the journal entry.
7. Click Save and new or Save and close.

However, I'd still recommend reaching out to your accountant to have hands-on support from technical and accounting perspectives. If you don't have an accountant, don't sweat it. You can find one here in our Resource Center.

In case you need to enter your employee’s year-to-date paycheck info and company totals, check out this article for more guidance: Add pay history to QuickBooks Online Payroll.

Additionally, here is an articles to assist you in reporting your employee’s earned tips, as well as guidance on creating a payroll summary report to view your payroll totals, including employee taxes and contributions in QBO Payroll:

• Pay and report tips.
• Create a payroll summary report in QuickBooks.

Let me know by adding a comment below if you have more questions or require additional guidance about handling tips in QBOP. The Community is 24/7 available for your needs. Take care!

It's frustrating that you aren't even reading nor understanding the question or concern. 

The issue is that tips need to be accounted for as wages for an employee or they will not match the wages on payroll. Clearing the liability does not add it as a wage it just makes the liability go away. Is the only way to solve this is by not accounting for it as a liability and just accounting for it as a wage to begin with? Please re read this thread to understand the issue at hand before responding. 

Hi Nunesauto.  We have tips collected flowing into a tips liability account and then coming back out of that account when they are paid to the employee.  Tips are not going into the wages/salary expense account.  I hope that helps.

@Nunesauto 

Tips are not income when collected or an expense when paid.  They are a liability when collected and a reduction in that liability when paid.  When collected, assigned the deposit/cash to a liability account and when paid out, assign the same liability account to the payment made to the employee(s). 

@Nunesauto 

Ignore my post.  I missed the post by @accounting-healt saying the same.  

But tips are considered wages on payroll, so the wages on payroll will not match with quickbooks. 

Someone please correct me if I'm wrong, but the conclusion we came to is as follows.  Accounting for tips this way will result in your payroll wage reporting not matching the wage expense in QB.  However, this is accurate.  They do not match because tips are not an expense of your business, only a liability until they are paid out to the employees.  Tips are reported as wages and you will pay payroll tax on them, but they shouldn't be included in your payroll expense because they are not an expense you incurred.  Your payroll reporting will be higher than your payroll expense in QB and subsequently, the payroll expense you claim on your income tax return.  I had always been told to ensure that your payroll reporting matched the payroll expense that you claim on your tax return or it would be an audit flag.  In fact, I think Turbo Tax even asks that question if I'm not mistaken.  The accountant that I consulted in my quest for the answer, told me that as long as you are paying payroll taxes on the higher number that includes the tips, and the wage expense you are claiming is less than what was reported, it isn't going to throw up a flag.  They don't care if you claim less of an expense-you just don't want to claim more.  I'm not sure if that is correct, but that was the conclusion we came to and this is how we handled it.  I'm no expert.  Just sharing what I found out. 

Thank you! Your explanation makes the most sense so far. I believe you are correct! Appreciate you going into detail to explain why we would do it this way. I will be handling the same.

You're welcome. I'm glad this was helpful! 

I am having a similar issue. I do a journal entry to record sales. On the journal entry I post a credit to the Employee Tips clearing account. Then, on my payroll journal entry,  I don't track it. I need to pist a debit to the account so I can clear it out. I know the offset is cash, but my journal entry already has the correct cash amount that ties out amd creates a match with the bank feed. In order to post the debit without changing my credit to cash, I would have to reduce the amount of my debit to wages by the amount I am debiting the Employee Tips clearing account. This will create a variance between my total wages in QBO and the total wages on our tax reports and payroll reports. I already have a variance due to the pre-tax employee healthcare deductions. I'm not sure what to do. It seems like there must be a better solution.

@Win Strategies 

Tips aren't a wage expense, so you should reduce the wage expense debit by the amount in the clearing account and debit the clearing account.  If you debit the wage expense for the amount in the tip clearing account, that will reduce your net income, which is incorrect.  Your payroll software should be able to track tips for payroll reports.