Tip Pooling, Tip Sharing, Tipping Out: How and Why Restaurants Split Tips

In the hospitality industry, tips (or gratuities) aren’t icing on the cake: they’re often the reason employees can make a living wage. The process of splitting tips — i.e., tip pooling, tip sharing or tipping out — helps to ensure that everyone who contributes to a customer’s experience can reap the rewards of a job well done.

To truly benefit your team and business (without damaging your culture) tip pooling or tip sharing must be done fairly, transparently, and in accordance with current regulations. 

Whether you’re in California or Connecticut, here’s an overview of how tip pooling (or tip sharing, or tip splitting) should work, plus some resources to make sure you’re in compliance with the laws in your own state.

Before we dive into various tip-out or tip pay-out methods, it’s important to understand some basic terms and stipulations around restaurant tips.

What is a tip? 

A tip, or a gratuity, is a sum of money that a restaurant customer pays in addition to their check amount. It’s important to note that a tip or gratuity is not mandated. In the U.S., a tip is often expected, particularly at full-service restaurants — but it’s not required. Generally, a tip or gratuity is somewhere between 10-20% of the total check amount (before taxes and other fees). However, the tip amount is ultimately left to the discretion of the customer.

Who can receive tips?

Tips belong to employees, period. While restaurants can redistribute tips by way of a tip pool (more on that below), managers and employers cannot participate in tip pools. (With that being said, if a manager receives a tip directly from a customer, they are entitled to that money.) 

There are some positions that are commonly tipped — like servers, bartenders, bellhops, valets — but the title isn’t what really matters. Your employees qualify as tipped employees if they “customarily and regularly” receive more than $30 in tips per month.

Non-tipped employees are generally back-of-house staff, like chefs, line cooks, dishwashers and janitors. These people contribute to a guest’s experience, but they don’t actually interface with the guests and therefore don’t have the opportunity to receive a tip.

What’s the tip credit?

Employers in the hospitality industry can legally pay their employees less than minimum wage if their employees’ tips make up the difference. When employers do this, it’s called taking a tip credit, because they’re crediting their employees’ tips toward an employer obligation to pay minimum wage. (Keep in mind: not all states allow tip credits. To check out minimum wage rules for your state, go here.)

Tip Pooling for Restaurants

Now let’s take a look at the ins and outs of tip pooling: what it is, how it works, and different tip pooling structures that your restaurant might consider.

What is tip pooling?

Tip pooling is a practice in the hospitality industry where tipped employees contribute the tips they’ve earned into a pool at the end of a shift. That pool is then divided (often equally, but not always) among a designated group of employees. Simply put, all tips received during a shift are pooled and then redistributed among employees.

When restaurants require tip pooling, they’re subject to certain regulations at the federal level, as well as state-level regulations that vary depending on where your restaurant is located. Illegal tip pools have led to multimillion-dollar lawsuits for restaurants, so it’s important to ensure your restaurant is operating within the letter and spirit of the law before instituting a tip pool.

What is tip sharing?

People often use the terms tip pooling and tip sharing interchangeably. And in reality, there’s no real legal definition for tip sharing. From a legal standpoint, we typically see the term “tip pooling” used as a broad, high-level category for the process of contributing any amount of tips to a pool and redistributing them (including what you might consider tip sharing). Learn more about the difference between tip pooling and tip sharing.

However, while tip pooling is often (but not always) based on an equal distribution of pooled tips, tip sharing is based on percentages that vary based on position. For example, servers may keep 60% of their tips and “share” the other 40% with other employees, including FOH staff like bussers and hostesses, and/or BOH staff like dishwashers and line cooks.

What is tipping out?

Tipping out is essentially the same as tip sharing. In the explanation above, the “sharing” part is actually tipping out. So a server would keep their share or percentage of the tip pool, then “tip out” bussers, hostesses, etc. based on pre-set percentages.

What are the current tip pooling laws for 2022?

The laws around tip pooling or tip sharing (and tip payments in general) are somewhat complex. Here’s a quick rundown of tip pooling laws and regulations.

  • Who can participate in a tip pool? Managers, supervisors and employers absolutely cannot participate in a tip pool, period. (If you have managers or supervisors that sometimes perform duties of a tipped employee, you can learn more about that here.)
    In 2018, the Department of Labor issued a rule change that now allows BOH employees to participate in a tip pool, but only in states where there isn’t a tip credit — so, primarily the West Coast.
  • Federal vs state tip pooling laws.: There are both federal and state regulations around tip pools. It’s critical to understand both the federal laws and the state laws that apply to your business. Keep in mind: if you operate multiple sites, each site is governed by the regulations where it is located. (In other words, it doesn’t matter where you’re headquartered.)
  • Tip pooling lawsuits. There have been multimillion dollar lawsuits due to illegal tip pools. Generally, tip pool lawsuits are the result of a) Management or management employees taking part in the tip pool, or b) Employees being unclear about the rules of the tip pool (lack of transparency and communication).
  • Changes to tipping regulations. Laws continue to evolve as they relate to minimum wage for hospitality workers, the tip credit, and more. Many of these changes are tied to administration changes. (For example: the 80/20 rule has shifted under Obama, Trump, and now Biden.) Changes to these laws can impact your tip pooling policies, so it’s important to stay up-to-date. 

Restaurant tip pool policies and formulas

In order to create a tip pool for your restaurant, you’ll need to answer these two questions. 

How is the tip pool being created or calculated? In other words, what’s going into the pool? A few common options:

  • Require all tips to go into the tip pool, then redistribute. 
  • Require a percentage of a server’s total sales to go into the pool. (E.g., a server’s sales for their shift total $500; the server might put 2% of his sales, or $10, into the pool.)
  • Servers keep a set percentage of their tips, then contribute the remainder to a pool.

Who is participating in the tip pool? We’ll say it again for the people in the back: Managers, supervisors and employers cannot participate in a tip pool. But you’ll need to decide which employees you want to benefit from the tip pool. That could be:

  • Only servers 
  • Servers and bartenders
  • FOH staff
  • FOH and BOH staff

Sample tip sharing policies and methods

Below are a few sample tip pooling policies. Of course, before instituting a tip pool policy, you’ll need to make sure it’s in accordance with both federal regulations and the state regulations that govern your restaurant locations.

  1. Basic tip pool. All tips are pooled, then evenly distributed among participating employees. This happens more frequently with QSR and fast casual restaurants — i.e., the type of establishment that might have a tip jar.
  2. Set percentages. Generally, for percent-based tip-outs, servers keep a majority percentage of their tips, then contribute the remainder to a pool. An employee’s role or position then determines the amount they receive from the pool.  

Real world example: Servers keep 70% of their tips and contribute 30% to a pool. Bartenders might get 50% of the pool, hostesses get 20%, bussers get 10%, dishwashers get 10%, and so on. 

  1. Points system. Employees are assigned points based on their role, and those points determine the percentage of the tip pool they receive. 

Real world example: Let’s say servers get 15 points, hostesses get 5 points, and bussers get 2 points. You’d want to determine the total points for each shift. 

  • 4 servers = 60 points 
  • 2 hostesses = 10 points 
  • 1 busser = 2 points 

So, total points = 72. 

If total tips earned in one shift is $792, the value of a point is (792 / 72), or $11. So each server would get $165 (15 x $11), each hostess would get $55, and each busser would get $22.

  1. Hours worked. Tip pool amount is divided by total hours worked. That number is then multiplied by the hours each employee worked to determine what they’re owed. 

Real world example: 4 servers worked a total of 25 hours. The tip pool totals $450. For every hour worked, servers earn $18.

  • Server A worked 4 hours, gets $72
  • Server B worked 7 hours, gets $126
  • Server C worked 8 hours, gets $144
  • Server D worked 6 hours, gets $108

Learn more about calculating shared and pooled tips here. 

A few other notes on tip policies

Employer tip “deductions”

As stated above: tips belong to employees, not employers. However, when your employees are tipped via credit card, federal law generally allows restaurants to deduct a proportionate percentage of the credit card processing fee from the tip. (That is, if you have to pay a 4% credit card processing fee, you can legally deduct 4% from your employees’ tips. Keep in mind: this is another case where federal law may permit this policy, but states may have stricter rules.)

Service chargers, surcharges and auto-gratuities

Service charges and surcharges aren’t gratuities. If any of those charges go toward employees, they must be treated as wages, not tips. That goes for auto-gratuities, as it’s a mandated charge and not at the discretion of the customer. For more information on these charges, check out our post with labor and employment attorney Beth Schroeder.

What is the best tip-out policy for your restaurant?

 Tip pooling can be a sensitive subject. Many restaurateurs have the best of intentions when they decide to establish a tip pool, but it’s not always done in a way that benefits the team.

While everyone plays a role in a guest’s experience, servers typically put in the face time and (arguably) can make or break the tip by managing the experience — i.e., establishing rapport, avoiding mistakes, doing damage control when the kitchen’s backed up or runs out of salmon. Servers and other tipped employees may be less excited about sharing tips with back-of-house staff.

And, unfortunately, there’s a level of distrust that your employees may have around tip pools, as some restaurateurs and employees have gamed or abused the system for their own benefit. While they’re certainly in the minority, they’ve given tip pooling a bad rap.

On the other hand, there are some pros to tip pooling and tip sharing with non-tipped employees. It keeps anyone from having a truly terrible night in terms of tips earned. Also: Your back-of-house staff certainly contributes to the experience a guest has — and they’re working just as hard as their tipped co-workers — but they don’t have the earning potential that comes with being a tipped employee.  

If you’re establishing a tip pool for the first time, after ensuring that you’re 100% compliant with state and federal laws, think through the policies and specific percentages that will work best for your restaurant.  

Then, focus on transparency: clearly communicate your objectives and policies. Not only is it required by law that you provide oral or written notice, but it’s also important from a culture and trust perspective. If employees understand the thought and logic behind your decisions, they’ll feel confident that you care about the financial well-being of every person on your team.

You might also be interested in

Kickfin’s best-in-class tip calculation tool has some exciting new bells and whistles.

If you’re already using Kickfin’s tip pool calculator, then you know how much time and hassle you’re saving by automating everything. (And if you’re not? Head over to our tip pooling software page to see how it works!)

As we partner with more restaurants to bring their tip management into the future, we’re continuing to innovate our product so we can address their biggest pain points.

In this case, that means enhancing our tip pooling features so you can auto-calculate tip amounts even for the most complex or unique tip pool or share policies.

Check out a few of our latest features that will make tip calculations easier than ever.

New Release: Splitting Large Party Tips 

If your restaurant often hosts large parties, you know that the tip share can get confusing. Say one server is taking care of a party of 40 with a bartender assigned to only make drinks for that party. Meanwhile, the server has a few other two-top tables that are getting drinks from the main service bar. At the end of the night, how do you ensure that the large-party bartender gets their fair share of the tip out (without spending an hour on your phone calculator)? 

Kickfin can now automate that process for you, alleviating questions from your event bartender and saving time and effort on the part of your managers. 

Seamless Integrations 

Kickfin is partnering with your POS system to integrate seamlessly with your existing restaurant tech. Already, we’re serving Toast customers through our integration — and your POS just might be up next. 

Kickfin integration users get access to new product features first, like our new tip-out transparency tool. Your employees can log into their Kickfin accounts and see exactly how their tips have been split between team members, offering them full transparency into your tip policy in action.

Manager Tips 

We’re always listening to feedback to improve the Kickfin experience, and this one goes out to all of our restaurant partners who asked us to streamline the manager tip reallocation process.

>>Learn more about managers & tipping laws

In most cases, managers are not allowed to earn tips since they are salaried employees. But we all know that managers often step in and take care of tables to help servers get out of the weeds. Well-meaning guests will most likely leave a tip, not knowing that the manager technically can’t accept them — so where does that money go?

Kickfin now features a default pool, where tips “paid” to a manager are automatically redistributed to tipped staff based on your restaurant’s tip policy. 

Improved Labor Data Accuracy

We all know how easy it is for an employee to forget to clock out after a long shift. And sure, they aren’t going to get paid for a 16-hour overnight shift, but when payday comes around, those extra hours create a nightmare for your payroll team. 

With Kickfin, all employees are required to be clocked out in order to finalize payments — so you’ll catch the labor data mistake long before your payroll team has to sort it out. 

Even Better Security 

We’re committed to protecting you and your employees’ hard-earned money, so we’re adding an extra layer of security for certain transactions. You can now enable double approval of payments that meet certain conditions:

  • First payment for new employees
  • Employees getting their first payout in X number of days
  • Employees receiving more than X payouts in a 24-hour period. 

With these extra guardrails in place, you can always be sure that the right money is going to the right person. Reach out to our support team to configure your custom security measures.

Using Kickfin is a win-win for operators, managers, and employees alike. Restaurateurs save on cash delivery and labor costs, managers shave hours off their workload, and servers have the same instant payment that they’re used to — without the hassle and uncertainty of cash. 

Want to learn more about Kickfin? Let us show you the ropes with a demo

You heard it here first: 2024 is the year of integrations. 

In an effort to make Kickfin even more user-friendly and adaptable for our partners, we’re working with restaurant tech leaders to integrate our tip management solution with their existing systems. 

First up — Toast! A trailblazer for cloud-based restaurant management technology, Toast is a favorite POS system for restaurants, food trucks, and bars. You probably know them best for being the first to create handheld POS devices, drastically changing the entire restaurant ecosystem. To make life easier for their customers, Toast partnered with Kickfin to create an integration that makes tip pooling, tip distribution, and calculation smoother. 

As restaurant tech innovators ourselves, this partnership is the perfect fit for Kickfin. 

Our goal at Kickfin is always to save time for managers, prevent loss for operators, and create more financial freedom for hospitality employees through pioneering technology that digitizes many of the analog processes that the restaurant industry is built on. 

As a member of the Toast Partner Ecosystem, we’ll be able to deliver our product to Toast customers and modernize their tip management systems with ease. Using technology that they’re already familiar with, Toast customers can reap the benefits of Kickfin with minimal ramp-up upon implementation.

“No two restaurants split tips the same way, but invariably, it takes too long and involves too much risk,”  said Justin Roberts, the co-CEO of Kickfin. “This integration allows for the utmost customization with a near-zero learning curve — truly the best of both worlds for restaurants that want to save time, reduce labor costs and make life easier for their team.”

And one of their partners is already enjoying the ROI with Kickfin. Bar Louie takes great pride in making tip distribution equitable for all of their employees, so they rely on a complex tip pooling system to ensure fair pay. Prior to using Kickfin, managers at each of their 60 locations spent 45 minutes at the end of every shift to make calculations and divvy out funds to all of their servers. Now, they’ve streamlined their tip-out process with Kickfin — and managers are doing the same work in less than a minute! That’s an annual average of 15,000 hours saved across their entire chain. 

>> Hear more Kickfin success stories

After implementing Kickfin, managers can spend their time on what matters most: delivering excellent customer service. That means more table touches, more support for your staff, and more time to focus on server training. 

With managers spending more time on the floor (instead of counting cash in the back), you’ll see better customer reviews, better service, and increased sales — all from digitizing your tip-outs with Kickfin.

We’re excited about our new partnership with Toast and the opportunity to make digital tipping a reality for their customers. For restaurants who aren’t using Toast, don’t worry! We look forward to providing similar integrations across the restaurant tech industry.  

Want to see these results for yourself? Find out how to become a Kickfin integration partner or check out a demo of our platform.

No growing pains here! 

We’re thrilled to announce that Inc. listed Kickfin in their list of the top 10 fastest growing companies in the Southwest. (In fact, we earned the #1 spot in the software category and were listed as #9 overall!) We’re honored to be included alongside innovative companies that are making a big difference in our region. 

Inc. measured Kickfin’s growth from 2020 to 2022 — which wasn’t an easy time for the restaurant industry, to say the least. In spite of the challenges posed by the pandemic, restaurant concepts across the country embraced Kickfin’s technology. 

As a group, the 2024 Inc. honorees averaged 136% growth and created 17,606 new jobs over a two-year period. Individually, Kickfin grew by a whopping 1,304% (yes, really!).

We want to recognize and thank both our amazing customers and the Kickfin team for being part of our success story and allowing us to be a part of theirs. 

Our Customers

For years, restaurants manually calculated and paid out cash tips — despite the increasing hassle and liability those old-school methods entail. It’s not because operators are tech-averse; there simply wasn’t a good way to automate the process that didn’t create new friction or require new workarounds. 

That’s precisely why we developed Kickfin. Of course, we’re proud of what we built and the team behind it (more on that below). But we owe a great deal of our success to the customers who trusted us enough to give Kickfin a shot — especially those early adopters who are now some of our longest-standing customers.

There’s a leap of faith involved when you partner with a vendor and layer in new technology, particularly when it impacts something as important and sensitive as how you pay your people.  We don’t take that lightly, and we are incredibly grateful for the opportunity to serve each and every customer who’s been on this journey with us.

>> Hear from our customers about their experiences with Kickfin

Our Team 

Every person on our team wholeheartedly believes in our mission and vision for the future. In short: we’re here to make the tip management process insanely easy for everyone so that paying out your people is (almost!) as great as getting paid. 

As backstory: Our co-founders, Brian and Justin, came up with the idea for Kickfin while dining out together and noticing that an armored car was dropping off cash. They asked why a restaurant would need a cash delivery when most patrons pay by card; the manager explained the cash was needed to pay out tips at the end of the shift. The inefficiency (and expense, and risk…) of that process was a lightbulb moment for Brian and Justin.

They set out to build a team who not only understood the problem, but could think critically and creatively about a solution — and bring it to life. 

From sales and marketing to product and support, every Kickfin employee has had a hand in the growth and success of our company, thanks to their passion for our purpose and their commitment to being best in class.

We’re proud of what we’ve achieved thus far, and we’re excited to continue collaborating with our customers, innovating on their behalf, and taking Kickfin to the next level together. Onward and upward!

It’s no secret that tax season is confusing and stressful, especially when you work in the hospitality industry. Many restaurant employees — whether they’re newbies or seasoned pros — aren’t exactly sure what’s required when it comes to reporting their income and filing taxes. There tends to be a lot of misconceptions particularly when it comes to reporting on tips received.

Maybe your employees are asking questions, or maybe you have a hunch that they should be asking questions. If that’s the case, we’ve taken the liberty of answering a few FAQs that your staff might find helpful. (Obligatory disclaimer: Of course, this is not intended to be tax, legal or accounting advice, and it’s always best to point them in the direction of a certified tax pro if they need help!). 

1. Do I have to report my tips to the IRS? 

Short answer: yes. 

Employees are required to report all income, including tips received while working at a restaurant, on their tax returns. This includes cash tips, credit card tips, and tips received via electronic payment platforms. 

Accurately reporting your income, including the tips you’ve earned, ensures that you avoid penalties and legal issues. But it’s not just about ensuring “Uncle Sam” gets his due; it also behooves you to avoid underreporting your earnings. More on that in a minute…

To make things easier, it’s advisable to keep detailed records of your tips to ensure accurate reporting come tax time. (If you’re a Kickfin user, of course, that’s easy to do!)

These days, you probably receive tips from customers in one of two ways: either they add a tip via credit card when they pay the bill, or they’ll leave a cash tip. Here’s what to know about reporting credit card tips and cash tips to the IRS

Reporting credit card tips

Most restaurants use POS systems to run their front-of-house operations. When customers leave tips on credit cards, they’re getting tracked in the POS and reported to the IRS by your employer. As a result, those tips are going to be included on the W-2 or 1099 that your employer gives you.

That’s because your employer is responsible for paying taxes on your tip earnings, too. In addition to paying payroll taxes, employers are required to withhold income taxes, Social Security taxes, and Medicare taxes on those employee tips, just as they would on other forms of employee compensation. They must keep accurate records of all tips reported by employees and include those amounts when filing employment tax returns.

(Keep in mind: this is the case for all tips left on credit cards, no matter how your employer is paying out those tips — cash, digitally, paycard or payroll. In other words, even if you’re leaving your shift with a wad of cash in your wallet, the IRS is well aware that you earned those tips, assuming your customers are primarily paying with credit cards.)

What’s more: because cash tips are less common and POS data is readily available, the IRS collects income information based on the credit card tips you input through their SITCA program. So, there’s really no way around reporting credit card tips to the IRS, and you’ll be liable for income tax on those tips. 

>> Learn more about SITCA and tip reporting

Reporting cash tips

This is where things can get a little muddy. 

It’s been common practice in the restaurant industry to under-report cash tips (or not report them at all). Technically, this is illegal. 

Bottom line: Employees are required to report all tips received when you file your taxes, including cash tips that were not run through your restaurant’s POS. Again, if you don’t accurately report your tip earnings, you could face financial and/or legal penalties. 

2. Does it affect my employer (and will they care?) if I under report my cash tips? 

Most restaurants are using the tip credit to decrease their monthly labor costs — so under reported tips could cause them some problems. 

Your employer’s biggest concern here is making sure that you earn at least minimum wage with the addition of your tips. If the majority of your tips are coming from credit cards, those are already automatically reported through your POS system, and your employer can track them for compliance purposes. But if you’re the rare server who earns more cash these days, then under reporting tips could cause a big spike in labor costs for your employer. 

In short, your employer probably won’t care if you don’t report all of your cash tips, but there are some serious reasons why you should…

3. What happens to me if I under report my cash tips? 

Leaving those cash tips untaxed might give you more freedom in the short run, but it could affect your future financial security. 

  1. You run the risk of being audited. No, it’s not super likely, but there’s always a chance that the IRS may be suspicious of your reported sales compared to your reported tips. This discrepancy could cost you in the long run.

  2. Unemployment and disability payments are based on wages. If you’re under-reporting your tips, it could hurt you if you ever need to rely on unemployment or disability (which many restaurant employees had to do during the pandemic). With your income artificially decreased, you’ll have to live off of much less than you’re actually owed.

  3. It may be harder to make investments in your future. We know great servers who are raking in the cash… but when you’re ready to make a major financial move, you might not have the documentation to back it up. For example, you might love a house that is technically in your budget, but without proof of your entire income, you might not qualify for a sizable enough home loan or be able to prove that you make three times the rent.

4. How does my tip reporting affect my taxes? 

Ultimately, how much you report in tips will determine how much you owe in taxes — that’s kind of the whole point of reporting your income. The more you report, the higher your tax liability. 

5. Why do I owe taxes every year? Aren’t they supposed to be withheld from my pay? 

They are — but your hourly wage probably isn’t enough to cover your entire tax responsibilities. You might remember picking up several $0 paychecks throughout the year. 

This isn’t necessarily a bad thing: many financial experts say that it’s actually better to owe taxes when you file. That means you had more freedom to invest throughout the year, and that you weren’t offering the government a loan that they have to pay back in April. 

But we get it. That big tax refund is way more fun to see hit your bank account, and you might not be prepared to pay up if you owe. If you’re afraid that you’ll owe taxes (or panicking about where you’re going to get the money to pay them), here’s what you can do to ease your burden. 

  • Set taxes aside each week. Even though you’re walking out with tips in hand (or in your bank account), that doesn’t mean they aren’t going to be taxed eventually. Each week, count up your tips and set 10-15% aside to save for tax season. If you have extra money leftover — take a vacation!

  • Explore write offs and deductions. Did you pay for your own uniform? Or for a safe alcohol service course? Are credit card fees taken out of your tips? All of these are deductions that you can use to reduce how much you owe.

  • Keep precise records. You’ll need to know how much you spent on work-related expenses and will need to back it up with documentation. If your employer is using Kickfin, your account is a great source of truth for all of your tip payout information. 

All of this reporting and recordkeeping can feel overwhelming — especially for servers who can’t remember how much cash they left with last night, let alone a year ago. Make sure your employees have all the tools they need to make smart financial decisions. Check out how Kickfin’s reporting can make life easier for managers and servers alike.

See Kickfin in action!