Setting up account properly to account for tips

You could set up a current liability account for tips collected.  It will basically be a clearing account for the tips.  When you pay out the tips from your cash drawer record it as a debit to the tip liability account.  When you received the credit card payments record the tips as a credit in the tip liability account.  If the account has a balance in it, it means that either you haven't paid out all the tips or your haven't collected from the credit cards yet.  

The tips don't affect your profit or loss, but you need to track them for each employee to report properly to the IRS.

Hello, in an self employ how do I find my company I’d?

Let me share some information on how to get your company ID, @Tvnews. 

You can get your company ID from the payment receipt that you'll be receiving from Intuit every month for your subscription. 

That'll be sent to the email address associated to your QuickBooks Self-Employed  account. 

For other concerns about your account or anything else, let me know by leaving a comment below. We're always here to help. Have a good day!

I have a small marina and the dock ladies sometime get tips added to CC charges.  They show up in QBO as "undistributed Tips" in a liability account.  I would like to pay them out in cash.  What is the best way to get this done.

Thanks,

Jeff

Hope you’re having a great day, @machodoccreekmar.

I can guide you how to get it done in your QuickBooks Online (QBO) account. You can create a check using the liability account to pay the dock ladies for their tips. Let me guide you through the steps.

In your QBO account:

1. Click the + New menu.
2. Select Check.
3. Choose the Payee from the drop-down list.
4. Select the liability account from the Bank Account field.
5. Complete the check fields. 
6. Enter the total amount of the tips under the Amount column.
7. Select the Print or Preview option if you want to print the check.
8. Once done, click Save and close.

You can also refer to this article for the detailed steps: How to write checks.

In case you need to link a deposit to your invoice, feel free to check this link that provides detailed information on how to do it in your QBO account: How to link a deposit to an invoice

Please let me know if you have other queries, I’ll be more than happy to assists you. Have a great day!

Once the tips are in the liability account, how are they handled through payroll?  The company I am working with pays out the credit card tips each night so the payroll is just reporting the tips in, so they are taxed, and then tips out, as they were already paid to the employee.  Both the Tips In and Tips Out items are set to post to the same expense account so it zeros out each week.  How do the tips that were posted into the liability account zero out?

Hi there, @Shannon Lam.

Thanks for following the thread. I'm happy to provide some information about handling tips in QuickBooks Online Payroll. 

First, you'll need to figure out what type of tips you're going to record in QuickBooks. Rather you gave your employee tips directly through cash or if you've added them to your employee's paycheck. If it's cash, this would be considered a Cash tip. If it's added on a paycheck, this would be a Paycheck tip. 

To help determine what type of type you've provided to your employee, check out Cash tips Vs. Paycheck tips. 

Please note: It's always best to consult with your accountant before recording tips in QuickBooks. Your accountant will know what's best for you and your business. If you don't have an accountant, don't sweat it. You can find an accountant here in our Resource Center. 

I've included some steps below that cover recording tips for your employee in QuickBooks below. 

1. Go to Payroll on the left pane menu.
2. From the Employees tab, pick the name of the employee.
3. In Employee details, hit the Edit icon next to Pay.
4.  Within the How much do you pay section, choose Cash Tip or Paycheck Tip.
5. Then, Done.

For additional details, take a look at About tips and paychecks.

Feel free to let me know if you have further questions or concerns. You can always reach out to the Community. We're here for you every step of the way. Take care and have a great weekend!

Hi Torri

Our business used to accept both credit and cash payments. Now we switch to cash only.  How do you do a journal entry for cash tip collected by employee?  We used to have a tip account payable for credit card tips.  Employees report their cash tip to us and we do pay tax on cash tip. 

I read about tips in and tips out.  I set up the accounts already and have been paying them .

The problem is I set up payroll account as a separate company from main checking account.  I do a journal entry of payroll expense at the end of each month in the main checking account.  How do I do the journal entry for cash in and cash out? Thank you

Am I correct in assuming you really can’t fund a “tip” liability account when receiving bank deposits from credit card service because it’s not an income account; which however, can be easily accomplished with an income account to liability GL entry.  But, doesn’t fact that the company receives the tips as income artificially inflate the overall income profile of the company?  Is there any way to have a true pass through of credit card tips?  In our case, the average nightly tip amount for all employees is over $250 which equates to an inflated income of nearly $100K a year.  Enough to  seriously impact EBITDA and ROI on a company generating a K-1 taxable $100K - $200K a year.  

What if your NET cash (cash sales MINUS paid out credit card tips) is a negative number?

It's good to see you here, @tinewinkjohn. Let me provide some details about negative net cash in QuickBooks. 

Negative cash flow occurs when a business spends more than it makes within a given period. Although negative cash flow means there is an imbalance in the revenue stream, it doesn’t necessarily equate to a loss. Often, it reveals temporarily mismatched expenditures and income.

To fix this, I suggest reviewing your categorized transactions within QuickBooks. This is to ensure that your book is accurate. 

Also, It would be best to consult an accounting professional for other possible options. They are can guide you on what account to use when setting up tips in QuickBooks. 

For more info, feel free to visit this article: What is Negative Cash Flow and How to Manage It.

Keep me posted if you have other accounting concerns with QuickBooks. I'll be around to help you further. Have a nice day.

I have the same question, our tips can be over $1k a night which is looking like sales, just brought a business and trying to get my head around this whole cc tips being converted into cash payouts each night and now understanding how I show that these are not sales. I have a headache :(

You'll need to enable to tip-tracking feature in QuickBooks Online (QBO) before you can proceed, @Barnslade. I'll share with you the steps.

Here's how:

1. Go to the Gear icon.
2. Select Account and settings.
3. Click the Sales tab.
4. Tap the Sales form content section, then enable the Tips (Gratuity) feature.
5. Hit Save, then Done.

You can then add tips to your employee's checks. Follow the steps below:

1. Click the + New menu.
2. Select Check.
3. Pick the employee under the Choose a payee drop-down menu.
4. From the Bank Account drop-down menu, choose the account from where you're making the liability payment. 
5. Under the Category column, enter Undistributed Tips, then type in the amount under the Amount column. 
6. Fill up the other fields as necessary, then hit Save and Close.

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 them. 

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. 

Hello,

I am using QB Desktop for payroll. How are cash tips reported when utilizing the hourly credits from the state?

We pay our servers and bartenders full minimum wage $13.00. The State of CT allows a 50.9% credit for tips. How do I setup? 

I ran a sample 941 Report and the tips are negative on line 5b. I'm doing something wrong, just can't figure it out. 

Please help!!!

Thank you

I'm here to help you have accurate paycheck records, @Marilia. 

You'll need to download first the latest tax table before performing any payroll tasks. These updates will provide accurate rates and calculations for supported state and federal tax tables. 

Then, we need to make sure you're meeting the minimum wage requirements every time you process payroll so you can take advantage of the tip credit. Here's how:

1. Double-check the hourly rate for each pay period
2. Update the hourly rate in payroll each pay period

For more detailed instructions, see this article: Pay and report tips. It contains the setup process.

Feel free to leave a comment if you have follow-up questions about tips. I'll be standing by for your response. Have a great day.

Hello,

Thank you for your reply, however, I need further clarification. 

- I am paying bartenders and servers minimum wage $13.00.

-How do I setup QB to receive the hourly credit for the tips?

-How do I report the cash tips for tax deductions?

-My 951 report line 5b is reporting a negative total for tips, I'm doing

something wrong....

Please help!

Thank You

Good to see you back, @Marilia.

Let me share additional information on how you can take advantage of the tip credit hourly wage. 

To start, you need to calculate the employees hourly rate for each payroll period. I have the formula to share to help determine if an employee earned enough in tip income to bring their hourly wage up to the mandated minimum wage for your state, county or city.

To determine the employees' hourly rate, here's how:

Hourly Rate = (( wage rate X hours work in the pay period) + Tips) \ hours worked in pay period.

For more information, see this article: Pay and report tips.

I also suggest consulting a tax professional or financial advisor for guidance in setting up your account. To make sure that your payroll records are on the right track.

Additionally, if you need tips and related articles in the future, visit our QuickBooks Community help website for reference: QBDT Self-help. 

Feel free to message here again if you have additional concerns. We're always around to help in any way we can. 

I have the same problems. Our Rest. use POS system and published daily activities to QuickBook online.

We use QuickBook payroll services.

At the end of the month, in P&L we have payroll records with Gross pay/Tips pay/ ER taxes accordingly; at the  Balance Sheet side, we have Undistributed Tips WH.  If my Journal Entry is to Dr. Undistributed Tips WH and Cr. Wages Expenses, that will lower the total Payroll expenses. 

How do I fix this problem?   

Thanks

Sandy

When applying the journal entry to show you paid the tips out, do you debit tips payable account and credit the checking account that was used to pay employees through payroll?

So here is my understanding and what I do.  Your daily journal entry records menu items as a credits to (pizza, beer, sandwiches, etc). and a debit to (bank acct, cash on hand).  Sometimes your cash on hand will go negative because your credit card tips exceed your cash collected.  This would give you a negative cash received so that is impossible to deposit a negative amount.  Weird but it happens all the time. Let's say you have four customers each ordering $25.00 worth of food.  Customers A, B, C D all order same item(Pizza).  Your tips are received as follows (A-$5 CC tip), (B-$5 CC tip), (C-$5 CC tip) & (d-$5 Cash tip).  

CC-Tips $15.00

• Cash Tips $5.00
• Journal Entry(s):
  • • To Record Daily Sales and funds received
      • Debit: Bank acct $115
      • Debit: Cash on Hand $5
        • Credit: Sales Pizza $100
        • Credit: Tips Payable $20
    • To Record Tips paid
      • Debit: Tips Payable $20
      • Debit: Cash on Hand $20

Hi Joan-

I like your answer and I'm currently using an "Unallocated Tips" liability account for one of my clients.  At the  end of each month, I create an entry to debit the Unallocated Tips liability account with the total amount of tips paid out and credit an Other Income account

The problem is that the Other Income account shows up on the P&L as part of the business's income.  Is there a better account to credit so that the income doesn't show up on the P&L?

Thanks

Greg

Ever find a solution for this?

Currently have a restaurant using qbo, bank acct connected, and Square POS connected. Each day square posts sales including cc tips collected. It goes to a tips liability account on the balance sheet. Payroll us ran using QBO and the Paycheck Tips selection for employees. So, when running payroll, the tips are paid out and tracked to each employee, shows up on the P&L as wages, but doesn't clear out the tips liability account. If I make a JE to clear the tips liability account, the only place to balance it would be wages, but that will "double dip" the cost of wages...once on the paycheck when running payroll, second on the JE. Any guidance on best practice to accomplish this without disconnected the app transactions from Square and entering manually? TIA

Thanks for joining in on this thread, mintbooks. I'm here to ensure you'll get the assistance you need in clearing out the liability account in QuickBooks Online (QBO) when paying tips to your employees.

First, let's track the mapping of your Square transactions to ensure they're accurate. Since you're using the Square POS, I'd recommend contacting their customer support team. They have appropriate tools to check the mapping and request to re-map the account to where the tips are imported. If you're using the Square app to track your transactions, we can also ask for assistance from them to exclude the tips.

In addition, we also suggest consulting your accountant for further help.

Moreover, we can categorize transactions so we can review and place them in the correct accounts. It also looks for and tries to match a transaction you've already entered in QBO to avoid duplicates.

If you have additional concerns about setting up accounts, we're always available in the Community to help. Have a good one, and take care!