ACCOUNTING & PAYROLL ISSUES FOR RESTAURANTS TIPS AND SERVICE CHARGES
18 JULY 2019
Credit card tips not paid in cash
Restaurants can choose to pay the credit card tips in cash or pay them with the next regularly scheduled payroll. The setup for running the unpaid tips through payroll is similar to what is described above, with one small — but important — difference. If the employee has not been paid for the credit card tips, don’t use the Tips Deduction item in QuickBooks Desktop or the Cash Tips item in QuickBooks Online. This ensures that the amount of tips reported will be paid out to the server.
In the case of QuickBooks Online, select “Paycheck Tips” as the additional pay type so the unpaid tips are added to the paycheck:
It is also possible to have a hybrid scenario where cash tips are kept by the servers and credit card tips are included in payroll. In this case, two different Tips payroll items are required. One to report the tips the employee already received and another to report what needs to be added to the paycheck. When using an outside payroll processing provider, make sure there are options to add unpaid tips to paychecks and to tax tips the employees have already received.
Service Charges
As discussed in part one of this series, automatic gratuities are not considered tips for accounting and payroll purposes. They are income to the restaurant. If the restaurant chooses to pay any or all of the service charges to the employees, they are considered wages. The only special treatment for payroll is to make sure you add them as a regular pay item and tax them the same as their normal hourly wages. In many payroll processing systems, this can be done by adding a separate wage item to track Service Charges. It is important to understand that service charges are not eligible for the employer tax credit on reported tips, discussed below.
Accounting for Payroll
The easiest way to manage the accounting for payroll is to use a native payroll program inside the accounting software that is mapped to the correct accounts. Restaurant Accounting with QuickBooks describes in detail how to track payroll taxes, tips paid, wages paid to Chefs, Servers, Hosts, Bussers, Bartenders, etc. in QuickBooks Desktop.
QuickBooks Online does not allow you to map different wage items to different expense accounts. However, depending on the level of detail desired on your Income Statement, journal entries can be entered to move gross pay from one wage account to another.
Outside payroll processing providers will often include a way for you to automate the payroll entries into your accounting system. Some providers do this with journal entries that can be easily imported, with an API (application programming interface), or by making reports available that provide all the information needed to enter the payroll into your accounting system manually. It is important to understand what the payroll entries should look like so the integration or manual entry is done correctly.
Let’s focus on the case of an outside payroll service provider. They will tax the tips already received, pay tips not previously paid out, issue paychecks and direct deposits to the employees, pay the tax liabilities, and pull the money out of the restaurant bank account to do it.Payroll entries will include net paycheck amounts paid to employees and payroll taxes paid to the government. To best explain how this all works, let’s look at some real numbers. Consider these assumptions: