Progressive Payment Solutions

What Should Your Business Know About Accepting Tips?

How can your business legally accept cash and credit card tips without causing problems with customers or the IRS? PPS shows you how.

While tipping used to be reserved for businesses like restaurants and coffee shops, the pandemic has ushered in an enormous boom in tip requests from all sorts of different businesses. 

However, it’s important for a business to accept tips the right way. So what should your business know about accepting tips? Let’s find out.

What the IRS says about tipping

One thing is certain: you don’t want to mess up when it comes to reporting income to the IRS, including with accepting tips. That’s why the IRS website makes tipping matters clear. According to that page, the following is considered a tip:

  • Receiving cash tips directly from customers.
  • Receiving tips from customers via electronic settlement or payment. This includes credit cards, debit cards, gift cards or any other electronic payment method.
  • The value of tickets, other items of value, or any noncash tips
  • Tips received from other employees via tip pools, tip splitting, or other tip sharing arrangement–including informal tip sharing.

So now the question is: do I have to report tips to the IRS? The answer is yes, unless they are less than $20 per calendar month.

If they are $20 or more per calendar month, they are considered income and thus subject to Federal income taxes. If they are tips received by an employee, they are also subject to social security and Medicare taxes, which needs to be reported by the employer.

It’s important to note that all tips $20 or more per month must be reported to their employer in a written statement/report. This needs to include:

  • Employee’s name, signature, address, and social security number
  • Employer’s name and address (establishment name if different)
  • Month or period the tip report covers
  • Total of tips received during the month or period

Good etiquette for businesses who accept tips

The pandemic, record inflation, and wage hikes have left a number of businesses struggling to remain profitable. Thus, many have been more forward with asking for tips–both in frequency and suggested tipping amount.

However, overly-aggressive tipping requests are starting to backfire, causing “tipping fatigue”, also known as “guilt tipping” among consumers. For example, some businesses suggest a tip of 35% or more of the bill, while others ask for a tip for simply doing their job rather than a reward for excellent service.

However, a report on tipping shows how essential of a component tipping is for many jobs, especially in the service industry. Not only that, but certain states like New Jersey have a two-tiered minimum wage system that makes tips a necessity for service workers to make a livable wage. So how should you accept them?

Important tips for accepting tips:

  1. Tipping should reward great service. In other words, don’t put a tip option on your payment screen if the customer had to wait in line and place their order themselves–and especially if they picked it up themselves as well. 

Other non-service industry businesses should think twice about a tip screen. For example, a recent news report on tipping showed that people are tired of being asked to tip everywhere, such as at clothing stores. This trend may ruin tipping for those who depend on them by burning out customers from too many tipping requests.

  1. Don’t ask for a tip if it’s to be shared with management. Since tipping should be a reward by the customer to the worker for their excellent service, it is seen as greedy and in poor taste for management to take a cut of that reward. Again, that was supposed to go to the employee for their hard work–especially since managers normally make far more money.
  2. Let the consumer decide their tip in privacy. A viral TikTok video perfectly illustrates why so many customers feel awkward when workers watch them as they enter their tip amount. A tip should come from gratitude–not guilt. So enable a privacy guard above the tipping screen or place the tip jar in a spot that isn’t too obvious.

How to accept cash tips

Speaking of tip jars, many businesses still opt to accept tips the old fashioned way by accepting cash tips. While cash is less used than ever, it’s still one of the easiest ways for a grateful customer to show their appreciation for the service they received.

If you choose to do accept cash tips, remember two things:

  1. Cash tips must be included in the tip record submitted to the IRS mentioned above.
  2. Use good tip jar etiquette. Let it attract customer’s attention without guilting them into giving a tip. So make sure to convey the idea that tips for great service are appreciated without making it a requirement.

How to accept tips on a POS

Not long ago, point of sale (POS) systems simply had a mag-stripe reader to swipe credit cards and a small screen to scribble a signature. Now, we’re accustomed to seeing a large touchscreen that contains everything needed to complete the transaction–including the tip option. 

However, different businesses have different needs when it comes to POS systems. Some businesses need a lightweight, battery-equipped machine that lets workers take it on the go. Others like a stationary POS system at the checkout counter with a large screen that does everything. 

Either way, if you want to accept credit card, debit card, or gift card tips, you need to ensure that your POS has the technical capabilities to offer tipping options to the customer while making a payment. 

Progressive Payment Solutions is happy to help our clients select the best equipment for their unique business. Contact us today for help with selecting a POS that’s right for you.

Is a service charge the same as a tip?

Since a tip is traditionally for great service, some mistake a service charge for being the same as a tip. However, this is not the case. And the IRS again helps us understand the difference:

  • A tip is a voluntarily given amount that is determined by the customer and given to whomever they choose, such as handing a barista money for your coffee.
  • A service charge is a fee automatically charged by the business for an event or service, such as automatic gratuity for large parties at a restaurant.

It’s important to note that a service charge should not be included in a tip record, mentioned earlier. 


Tips play a crucial part in American society as well as provide essential income for countless service workers. So if your business accepts tips, make sure you properly report them to the IRS, use good etiquette while accepting them, and have the proper equipment to accept them electronically.

Progressive Payment Solutions offers a wide selection of POS systems for businesses of all types to accept payments, including tips. Contact us today to get everything your business needs to accept payments–including the guaranteed lowest processing rates in the industry.

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