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Tipping is a big part of the hospitality industry. It’s so important that federal law regulates it, including detailed recordkeeping requirements set by the IRS. Employers can even pay lower wages to tipped employees, counting tips as part of their income.
But while all employees contribute to delivering great service, not all of them interact directly with customers to earn tips. That’s where tip pooling comes in — a system designed to ensure fair distribution of tips among all contributing staff. In this guide, we’ll cover all you need to know about this compensation method and how to implement it effectively in your business.
What is tip pooling?
Tip pooling is a system in which all tips collected by employees are combined into a shared pool and then divided among eligible staff members based on an agreed sharing formula or policy.
For example, in a restaurant, servers, bartenders, and bussers may contribute their tips into one pool, which is then split based on hours worked or another agreed upon method. Tip pooling is most common in hospitality businesses such as restaurants, coffee shops, and bars, where teamwork is central to service.
The goal of tip pooling is to create a fairer distribution of tips and reward teamwork. It also ensures that everyone who contributes to the customer experience benefits — not just the employees who interact directly with guests.
How does tip pooling work?
Tip pooling is typically managed in an organized way, as decided by a business, to track and distribute tips. For example, employees who receive cash tips might hand over their tips to a manager or designated person at the end of the shift. This person keeps track of the total amount and logs the total cash tips collected to ensure transparency and accountability. At the end of the shift or day, the cash tips are divided according to the tip pooling policy. Employees might receive their share in cash on the spot or have it added to their next paycheck.
However, the majority of tips today come through credit card payments. These tips are automatically tracked by the restaurant’s point-of-sale (POS) system. The POS system records the total tips and assigns them to the tip pool. At the end of the shift, the system calculates the pooled amount and divides it according to the distribution policy. Employees typically receive their portion of credit card tips in their paychecks, but some establishments might distribute them daily when possible.
To ensure fairness, businesses often display tip calculations for everyone to see or provide a detailed breakdown on employees’ pay stubs. This ensures trust and avoids disputes about who gets what.
Tip pooling vs. tip sharing/tipping out: What’s the difference?
Although these terms are sometimes used interchangeably, there are key differences:
- Tip pooling: Employees contribute all their tips to a shared pool. The pooled amount is divided among eligible staff based on criteria like role, hours worked, or a fixed percentage.
- Tipping out (tip sharing): A more informal practice where employees who directly receive tips (e.g., servers or bartenders) share a portion of their tips with support staff (e.g., bussers or food runners). The difference here is that employees keep their tips and then tip out a portion to other support staff rather than combining all tips into one pool. For example, a server may earn $200 in tips during their shift and tip out 5% ($10) to bussers and 10% ($20) to bartenders.
Tip pooling methods
There are a few different methods available for sharing pooled tips. The right method for your business will depend on your team’s structure and the roles of your tip-eligible employees. Any methods you choose must comply with federal, state, and local laws (more on that later), so it’s important to understand your legal requirements. Below are the most common ways to distribute pooled tips fairly and effectively.
- Shift-based pooling: The workday is divided into distinct shifts, and tips earned during each shift are pooled and distributed among the employees who worked during that specific period. This method ensures that only the staff contributing to a particular shift share in the tips earned during that time.
- Hours worked (workday) tip pooling: In this method, tips are divided based on the number of hours each employee worked. This ensures that those who work longer shifts receive a proportionate share.
- Job-based or role-based tip pooling: In this method, certain percentages will be predetermined and distributed for certain roles. Customer-facing roles typically receive a higher percentage versus back-of-house roles or roles that don’t interact much with customers. This method ensures that tips are distributed in proportion to the level of customer interaction and contribution to the service experience, recognizing the varying responsibilities of different roles.
- Tip pool point system: With the tip pool point system, a number of points are assigned to each role by how much responsibility they have during their shift. Customer-facing staff typically receive higher point values, while back-of-house employees receive fewer points.
How to calculate tip pooling
Before you decide which pooling approach is right for your business, it helps to see how the math actually works. Here are a few examples that show how tips can be divided.
Equal split by shift
If employees work the same number of hours in a shift, tips can simply be divided equally. Suppose three servers finish a dinner shift with $300 in pooled tips. Because each worked the same hours, the math is straightforward:
$300 ÷ 3 servers = $100 each
Split by hours worked
When shift lengths vary, you can divide tips according to hours worked. Let’s say three servers bring in $220 in tips. Two work eight hours, and one works six, for a total of 22 hours. The first step is to divide the total tips earned by the total number of hours worked to get the tip rate per hour:
$220 ÷ 22 hours = $10 per hour
Then multiply by each server’s hours:
- 8 hours × $10 = $80
- 8 hours × $10 = $80
- 6 hours × $10 = $60
Points system for mixed roles
A points system helps when you want to include both customer-facing staff and back-of-house employees. For example, servers and bartenders might be assigned higher point values because they interact directly with guests, while roles like bussers or dishwashers might receive fewer points. Let’s say a shift includes three servers (40 points each), two bartenders (20 points each), and two bussers (5 points each). First, add up the points for all staff:
- 40 points × 3 servers = 120 points
- 20 points × 2 bartenders = 40 points
- 5 points × 2 bussers = 10 points
That’s a total of 170 points.
Each point is worth:
$340 ÷ 170 points = $2 per point
Then multiply by role:
- Servers: 40 × $2 = $80 each
- Bartenders: 20 × $2 = $40 each
- Bussers: 5 × $2 = $10 each
These are just a few of the most common ways to run the numbers. The big decision comes down to choosing the tip pooling method that best fits your team structure.
Tip pooling laws employers should know
If you decide to use a tip pool, you need to be aware of the legal requirements. The U.S. Department of Labor (DOL) defines a tipped employee as someone who regularly receives more than $30 per month in tips. Under the Fair Labor Standards Act (FLSA), there are strict rules about how tips are shared, reported, and taxed.
For example, if you pool tips, you can count a portion of an employee’s tips toward meeting the federal minimum wage, but only if the pool includes employees who customarily and regularly receive tips. If you want to include back-of-house roles such as cooks or dishwashers, you can do so, but you cannot claim the FLSA tip credit and must pay tipped employees the full hourly minimum wage.
Another key requirement is communication. Before you take a tip credit under the FLSA, you must inform tipped employees how much of their pay will come directly from you, how much will be covered by tips, and that they will keep all tips except when part of a valid tip pool. If you don’t provide this notice, you cannot legally claim the FLSA tip credit. Be sure to review the full list of communication requirements to stay compliant.
In addition to communication, you are also responsible for:
- Training employees on how to properly report tips.
- Submitting accurate monthly tip reports.
- Paying Federal Insurance Contributions Act (FICA) and state income taxes on tipped income.
- Ensuring that reported tips meet the federal minimum threshold for tipped employees.
- Following state-specific wage and tip credit rules where they differ from federal law.
Because tip pooling laws can be complex and vary across jurisdictions, it’s important to check both federal guidance and your state’s labor laws before finalizing your policy.
Tip pooling pros and cons
Choosing which tip pooling method is right for your business depends on staff roles, employee shift setup, the distribution of responsibilities among those tip-eligible employees, and the laws in your jurisdiction. Like any pay structure, tip pooling has both benefits and drawbacks to consider.
Benefits of tip pools
Tip pooling can encourage teamwork and create a more equitable environment. Employees share in the rewards of delivering a great customer experience, whether they’re serving tables, preparing food, or supporting the front line in other ways. When structured well, tip pooling offers several advantages:
- Incentivizing kitchen and back-of-house staff who do not normally receive tips.
- Reducing competition among employees and instead promoting a collective effort to improve service.
- Fostering a shared sense of responsibility for tasks beyond direct customer interaction, such as side work or opening and closing duties.
- Building trust among staff when distributions are transparent and consistent.
Drawbacks of tip pools
Tip pooling may not work for every team. Some employees prefer to keep the tips they directly earn, and distributing them across a group can sometimes create friction. Here are some common challenges:
- Employees may feel less motivated if tips are shared evenly regardless of individual effort.
- Experienced staff may feel they are carrying the workload for newer or less skilled team members.
- Disputes may arise if the policy is not communicated clearly or if distributions are not transparent.
The best way to decide is to keep an open dialogue with your team and choose an approach that fits your company culture while complying with the law.
Being able to easily combine labor and sales transaction data to keep accurate records of hours worked and tips collected can help provide equity and transparency across your employee base.
Tip pooling considerations
Tip pooling can also affect the credits you claim under the FICA tip credit option. This rule allows you to take a tax credit for the employer portion of Social Security and Medicare taxes paid on employee tips above the minimum wage.
It’s important not to confuse this with the FLSA tip credit — the two operate under different laws and serve different purposes.The FLSA tip credit recognizes that employees earn tips because they work in your business. It allows you to pay a lower hourly cash wage to offset the tips they receive (which you cannot take a share of). However, you are still required to make sure that each employee’s total hourly pay meets or exceeds the minimum wage. The FICA tip credit, on the other hand, deals with employer payroll taxes and provides a tax break on FICA paid on tipped wages above the minimum wage.
Pooling tips may make it easier to ensure that all tipped employees stay at or above the minimum wage threshold. However, if you have several tipped employees, the administrative work required to manage pooling can balloon. For example, if you have tipped employees who share tips based on hours worked, you’ll need to:
- Track the hours each employee worked.
- Track the tips each employee collected.
- Check whether their total wages are above or below the minimum wage.
- Make up the difference if an employee’s wages fall short.
- Calculate the amount of tipped wages eligible for the FICA tip credit if an employee earns above the minimum wage.
Taken together, these considerations highlight why it’s critical to design a system that works for your business and complies with regulatory and tax requirements. Reviewing your approach with a legal or payroll professional can help you avoid costly mistakes — and reduce the administrative burden on your end.
Implementing tip pooling in your business
When adopting tip pooling, there are a few best practices to keep in mind.
Clearly define your tip pooling policy
Establish rules for pooling and distributing tips. Consider which tips will be allocated to the tip pool, the procedure for distribution, and eligible roles. Check applicable federal, state, and local laws to determine what is permissible in your jurisdiction.
Communicate openly with employees
Next, provide clear communication and documentation on your tip pooling policy, as required by law. Employees should understand why your business practices tip pooling and be able to ask questions about it.
Collect and track required data
To pool your employees’ tips, you’ll need to have at least the following data:
- Sales transaction and tip amounts
- Employee data, including job title, hourly wage, and tip eligibility; this includes back-of-house employees if you plan to have them participate in the tip pool
- Labor time, including timecards, timesheets, or employee shifts
You can collect this information by using integrated tools like POS systems for sales and tips, automated time-tracking software for labor data, and payroll software.
Automate payout calculations
Many businesses rely on complicated spreadsheets to calculate tip payouts. But when you manually pull in timesheets and sales data, there’s room for error, and it offers little visibility into your process for employees.
Automating tip calculations and payouts can be an efficient and accurate way of paying your tip-eligible employees. Square Team Management and Square Payroll automatically calculate tip amounts and sync tip payouts to employees’ payroll.
Square Team Management integrates with your Square POS to bring all your sales and labor data into one place, eliminating costly mistakes and frustrating workflows. By tracking your team’s hours alongside sales and tip transactions, Square Team Management and Square Payroll can help reduce manual data entry and error-prone calculations.
Credit card tips can be imported, pooled, and split within Square. You can adjust tip eligibility for each team member by role in the Payroll Team and Team Member List sections of your Square Dashboard. When you select to pool tips as your tip-importing method, credit card tips imported through Square will be pooled and split across the tip-eligible employees who were clocked in when the accompanying transactions occurred.
Build team culture with equitable tip pooling
When tip pooling is used correctly and employees are paid on time, it can lead to a culture of teamwork and cohesiveness among your employees. No matter what method you decide on, be sure that your calculations are fair and consistent among all your staff roles. For tip pooling to be successful, it should be in place to benefit employees. With accurate data tracking, automatic payroll, and scheduling insights and flexibility, an integrated solution can ensure your employees and business are successful.
