Welcome to the thread, @FLBabs.

I'm here to ensure you'll be able to set up and report tips accordingly.

In QuickBooks Online (QBO), there are different types of tips that your employee can receive. In your case, you can account for the tips as cash tips. These are tips your employees receive directly from customers in cash, not through a paycheck. And tips given through credit card charges converted to cash are also considered cash tips.

After that, you'll have to set up a payroll item for tips. Here's how:

1. In the left menu, click Payroll.
2. Go to the Employees tab.
3. Locate and select your employee.
4. From Personal Info, select Edit.
5. In Additional Pay Types, select Cash Tips or Paycheck Tips.
6. Select Save.

Once done, you can now run payroll and enter tips from there. 

For more information on managing tips, you can visit these articles:

• Pay and report tips
• Share tips with your team

As always, feel free to visit our QuickBooks Community help website if you need tips or related articles in the future.

Please know that you can post your concern here in the Community. We're always around if you need any help. Take care and have a great day.

MirriamM

Your suggestion means I will be paying my employees their tips AGAIN... They get their tips each night.  I ALREADY put their tips on the weekly payroll as cash tips - that is not the issue!!!  In 2021, there was a deduction (tips out) that would off set the expense on the P&L.  For 2022 that deduction has been going to a liability account on the Balance sheet.  If you enter cash tips on the payroll as you suggested, where do you suggest I put the deduction?  It is definitely not a liability.  As I stated previously, QBO's method is GROSSLY inflating my payroll expenses and creating a liability that I do not have.  If you have a suggestion on how to fix that, let me know. 

I understand that you had your own way of recording tips, @FLBabs. I've got clarification about the account used to offset the tip amount in QuickBooks Online.

The liability account serves as the tips' clearing account. You can make a debit to the tip liability account since you've already distributed them. Then, record the tips as a credit in the tip liability account when you receive the money. Although the tips have no impact on your P&L report, you'll need to keep track of them to file your tax returns correctly.

My colleague's suggestion above is for recording cash tips. These are given directly to the employees by customers in cash and aren't included in the paycheck.

Since it seems that you record tips by employee elsewhere, I highly recommend consulting your accountant about the accounts involved. They can suggest what's best for you and your business.

See this article for additional information about this process: Share tips with your team. 

I'll share this article with you as well: Cash tips vs. paycheck tips. It has a short description for each type of tip and when to use it. 

Don't hesitate to drop a comment below if you have other questions about tips in QBO. I'll get back to you as soon as I can. Take care.

First, I am the accountant

Second, it was not "my own way" of accounting for tips.  In 2021 QBO Payroll mapped "tips out" to the expense account.  For some reason that was changed in 2022.  Why not allow the customer to map the account to where it was mapped previously?

I understand that QBO is trying to dumb down accounting so that the average business person can use the software without an accountant.  What I don't understand is why you won't allow those of us who know what we're doing to use Payroll to it's full extent.

My solution is to do a journal entry after each (weekly) payroll so that my P&L is correct.  This is an extra step for me when it should happen correctly in QBO when the payroll is processed. 

I would also like help with this. Payroll is run with QBO, using the Paycheck tip option to pay employees tips. The problem is that all tips from clients are deposited into the employers account. It inflates the sales on the P&L since OBO payroll does not create a libality account to offset the tips that are not sales. Spent two hours on the phone with a representive today and at the end of the call they said it was a product limitation.

Waiting for a response.

Hello, How did you end up solving your tip problem? We handle our tips the same way, servers are able to take home a portion of their CC tips each night in cash depending on how much cash sales they had. They carry their own bank, we do not have cash drawers. Essentially we are exchanging cc tips for cash sales income. When the CC deposit clears the bank, our accountants use that entire figure as sales income. Then payroll happens and the total CC Tips reported are taxed then I have a deduction for the cc tips in cash (Retained Tips) that they already received. The problem for us is that the P&L shows those cc sales as asset but has the Gross Wages as the deduction. I am not getting any credit for the tips that were already payed. Do I increase sales by the amount of tips that were paid out daily - cash sales that never hit the bank account? Or do I create a Payroll Expense Credit for the Retained Tips amount? RN they are giving that credit to Owner Draw. My accountant is only using the bank account to do our P&Ls. Payroll is ran through QuickBooks. Thank you for your help!

RJD4 - exactly!  QB just throws up their hands and says it can't be done, yet it WAS being done in 2021 and I have the records to show it.  

Have you figured this out yet? I called them the other day to see if there was a way to map the tips liability account so the paycheck tips would pull from it and they went through two or three different people before telling me that they would "add it as a feature request" as though no one else had ever had this issue.

Their final "fix" was to do a journal entry to the bank the paychecks are paid from, but that seems way wrong to me. Would you mind sharing what your journal entry is?

I am in the same boat! I cannot believe QBO cannot solve this issue! There are many businesses that have tips! I just spent 3hrs on the phone with someone God knows where who couldn't understand my problem because they do not understand accounting. 

Client is a hairdresser and records tip income as part of the total deposit with the sales.

Cash DR100

Revenue CR 75

Tip Liability CR25 (This is being created automatically I guess thru Square which is fine since tips are a liability until actually paid out and delivered to the employee. 

NOW! I want to clear out the liability account when QB payroll does the payroll check. Why is this so difficult for them? 

Tip Liability DR 25

Cash CR 25

Done deal its that simple! The problem is, Quickbooks payroll apparently doesn't let you select a liability account for wages etc. okay...so then QBO, how do you suggest I zero out my tip liability that is a holding account? Do a journal entry? I don't have time to do that every week or every month for clients that I'm doing bookkeeping for. They should be able to select the tip liability account as being paid out when the pay the paycheck. 

I am in the same boat! I cannot believe QBO cannot solve this issue! There are many businesses that have tips! I just spent 3hrs on the phone with someone God knows where who couldn't understand my problem because they do not understand accounting. 

Client is a hairdresser and records tip income as part of the total deposit with the sales.

Cash DR100

Revenue CR 75

Tip Liability CR25 (This is being created automatically I guess thru Square which is fine since tips are a liability until actually paid out and delivered to the employee. 

NOW! I want to clear out the liability account when QB payroll does the payroll check. Otherwise this accumulates the whole year and just left.  

Tip Liability DR 25

Cash CR 25

The problem is when QB suggest to do a payroll check and use paycheck tips to fill in the amount of tips, then it just overstates my wages! If I use the example above, and say $200 for wages + $25 tip, it shows $225 as wages on my PnL which is OBVIOUSLY (QBO!) overstated! The client does not get a deduction for tips that they do not even pay, their customer pays their employee the tip! They are just holding the tips when received in a liability holding account waiting to be paid out in a paycheck. Then what am I supposed to do? At the end of the month etc. come in and do a journal entry to CR wages $25 and DR the tip liability for $25? How stupid is that? Can't their payroll system allow for the mapping of a liability to tips paid out? So frustrated!! PLEASE let me know if you have solved this!

Hi,

Did you ever figure this out? Square dumps the whole thing as income and I need to split it out. I was thinking I would put it in a liability account, but not sure how to clear it when the tips are paid out on the paycheck. I was hoping for a automatic entry, but guessing it has to be manually cleared??

I've spent literally hours and hours, over multiple days, throughout the last month, combing through approx. 1 bazillion comment threads on this topic, watching QBO support go round and round without ever just fixing the problem... sigh...

So here are the two options I've come up with so far.

Ex. Employee received a $500 direct deposit which includes $450 in wages and $50 in credit card tips.

Option 1.  Split the transaction. From the bank account, find the transaction for the specific "Payroll Check," then instead of just clicking "Match," select Categorize and split the transaction.

Ex. from the Split Transaction screen:

- Paid To: enter employee as the payee

- 1st Category: select Crew Labor (or whatever your wages expense account is called) and enter $450

- 2nd Category: select Employee Tips Payable (or whatever your tips liability account is called) and enter $50

This allocates the appropriate amount to the expense account and decreases the liability account accordingly.

- OR -

Option 2.  Create a journal entry after each payroll.

Ex. debit Employee Tips Payable liability $50 and credit Crew Labor $50.

This clears out the liability and reduces the expense for an accurate P&L.

Both options are tediously unnecessary considering this should be a quick fix on the tech side of things, in order for the platform to simply allow users to record tips properly... sigh again...

But in the meantime, these are the workarounds I've figured out. 

Which one is more convenient / less annoying depends on whether you're looking at this at the same time you're categorizing banking transactions or after the fact when a journal entry might be quicker / easier.

Either way, it's pretty exasperating to basically have to go back and re-enter employee pay & tips, essentially duplicating tasks for no good reason. So I hope the deluge of complaints will eventually result in an actual QBO fix. 

In fairness, this is the only glaringly tone-deaf issue I've encountered with the platform so far. Everything else has been pretty nifty. Just too bad I've wasted like a full week of my life trying to figure out this one little thing that just should work!!!!

This is a manufacturing company selling rum.  They sell locally and internationally.  How does one account in QBO for taking out  Atm transactions of say $1000 out of business then paying bartenders (nonemployees) $50 each at different locations for selling your product? Is this tips out? Is this a liability? Is this a business expense?

that is what I do also, when the tips are small.  What do you do when the tip is much larger than the cash taken in on that day?

THe paycheck tips are not debiting my tips clearing account. How can I fix this?

How can I do this but on QB Desktop?