Accepting tips from card payments, what you need to know

For anyone working in the hospitality and service industries in customer-facing roles, tips can form an integral portion of their wages.

Waiters and waitresses, hairdressers and barbers, painters and decorators and handymen and women are all frequently offered tips or gratuities from customers as a recognition of the good service they have provided.

For people who work shifts in services industries or are reliant on regular clients for their income, rather than an annual salary, tips and gratuities can be a greatly appreciated extra bonus, or a vital sum of their income.

But, as people progressively move towards carrying less cash and are paying more
frequently with cards and via online payment methods, how can the people who are
traditionally left tips and gratuities by their customers continue to receive these tips?

Accepting tips from card payments could be the answer.

How accepting tips from card payments works

Adding a tip or gratuity to a card payment is a relatively simple process.

There are two key ways in which tips and gratuities are taken with card payments;
discretionary tips and service charges.

Service charges are a percentage of the total bill added onto the final sum, usually set at between 10% and 12.5%. Very common in the United States, these service charges are being seen increasingly across the UK; particularly in restaurants and cafes.

These charges are suggested by the business as an additional fee for good service, however, they are ultimately optional and can be declined by the customer if they felt theservice was sub-standard.

With discretionary tips, the customer decides how much they wish to add to their total bill and uses the chip and PIN terminal, if it has gratuity capabilities, to make the gratuity payment.

When someone completes a payment via credit or debit card using a chip and PIN terminal, before they enter their PIN number, there will usually be a prompt asking if the customer would like to add a tip or gratuity on top of their bill.

If the customer wishes to add a gratuity then they key in the amount they want to tip and it is added to the overall total to be taken from their credit or debit card.

Tips taken in this way can be shared out to staff in a variety of ways, which can lead to some potential issues.

Potential issues with accepting tips from card payments

When a customer or client leaves a cash tip, that money is legally the property of the
member of staff who received it.

The company can have a say in how the tips get shared out among staff, but they can not claim that cash tip money as revenue for the business.

Systems of sharing cash tips can include methods where staff pool the money they all
receive in a ‘tip jar’ system and share the money equally. Or, the company may allow each individual member of staff to keep all of the money they are left as cash tips by customers and clients.

However, money paid as tips and gratuity via card payments legally belongs to the
businesses to which they were paid. Which can lead to issues with how they are
disseminated amongst staff.

With no legal requirement to pay staff these tips, some businesses may choose to keep the entirety of card payment tips as extra income for the business. Which can, naturally feel unfair to the customer-facing staff who may feel they are entitled to a portion of the money left as tips.

Other methods include pooling tips throughout the year to use to fund a staff Christmas party or other staff treats or using a tronc scheme to share the money out weekly, monthly or at other regular intervals.

A tronc scheme is a system of sharing out tips, service charges and gratuities to employees. It is a more formal version of the ‘tip jar’ system and especially useful for sharing tips

collected from card payments.

Tronc schemes use a nominated tronc master who will be responsible for collecting the tips, sorting the Pay-As-You-Earn (PAYE) tax to be paid on tips and sharing the tips among staff.

Generally, a tronc master is a manager or other senior member of staff but is not usually the owner.

Considerations for businesses accepting tips from card payments

If you are a business accepting tips from credit and debit card payments, you’ll need to decide which method of sharing tips among your staff you’ll use.

The type of business you operate and the number of staff you employ can help you when deciding which system you will operate.

If you are self-employed in a sector where you are likely to receive tips from your clients and customers, then you can decide whether to include your tips as part of your total revenue or as a separate income in a more traditional ‘tip’ manner.

A vital thing to understand as an employer or self-employed professional accepting and sharing tips collected from debit and credit card payments is the rules surrounding Income Tax and National Insurance.

While tips are not considered income in terms of contributing to the national living or
minimum wages, they are subject to tax.

Who is responsible for ensuring tax is paid on tips depends on who is responsible for
collecting the tips or gratuity.

If card tips are pooled by a tronc master, the tronc master is responsible for ensuring tax is paid on the tips.

When card tips are pooled by an employer, it is the employer who is responsible for making sure tax is paid.

And, for services charges, the employer is responsible for ensuring tax is paid.

One key benefit of accepting tips via card payments is that, because everything is done electronically, you will have a clear record of how much has been paid as tips, separate to the revenue of the business.

So, when it comes to calculating tax and sharing tips, the process should be simple with little room for human error.

RSM 2000’s general retail payment terminals can be configured to accept tips and gratuity from card payments. Our on-line credit and debit card payment systems can also record multiple purchase amounts so tips can be separated if required. Speak to us today to see how we can help your business to accept card tips.

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