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Tipping is a big part of the hospitality industry. It’s so significant that there are strict laws around it, including detailed recordkeeping requirements set by the IRS. Employers can even pay lower wages to tipped employees, acknowledging 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 distribution system where all tips collected by employees are combined into a collective pool and then divided among eligible staff members based on a predetermined sharing formula or policy.
Tip pooling can work for businesses where certain employees interact directly with customers while others are equally working on the order but never interact with customers. Some businesses that might consider tip pooling are:
- Quick-service restaurants
- Table service/full-service restaurants
- Coffee shops
- Bars
- Any hospitality-related business that has a strong teamwork culture
Depending on the needs of the business, owners and managers will use a variety of different splits, such as hours worked in a workday or hours worked in a business shift. It’s also possible for owners and managers to create multiple tip pools, for example, split tips for drinks and bartenders and split tips for food orders and servers.
Tip pooling can strengthen the working relationship your employees have and lead to a less competitive and more collaborative atmosphere, as long as those employees are working together equally to better a customer’s experience.
The goal of tip pooling is to foster a sense of teamwork and shared success. Every role is important, from the person who delivers plates to the table to the one ensuring dishes leave the kitchen looking perfect. By pooling tips, you ensure that everyone benefits from the efforts that make the service exceptional, even if some roles don’t directly involve receiving tips from customers.
How does tip pooling work?
In practice, the tip pooling process is typically managed in an organized way based on clear procedures 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. The manager logs the total cash tips collected to ensure transparency and accountability and also as required by law. 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, most tips today come through credit card payments. These 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. 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 versus tip sharing/tipping out: what’s the difference?
Although these terms are sometimes used interchangeably, there are key differences. In 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 (or tip sharing), on the other hand, is 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, 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
If your business operates in shifts, as most hospitality businesses do, this method might be ideal for you. Here, 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.
For instance, a coffee shop might organize its workday into three shifts: opening, float, and closing. During the opening shift, the schedule might consistently include two baristas and one prep cook. Under this tip pooling method, tips collected during the opening shift would be calculated at the end of that shift and shared among the eligible employees who worked it. The same process would apply to the float and closing shifts, ensuring that tips are fairly shared among employees who worked a shift.
Hours worked (workday) tip pooling
In this method, tips are shared based on the total hours worked by all tip-eligible employees during a workday. To determine each employee’s share, the total tips for the day are divided by the total hours worked, resulting in an hourly tip rate. Each employee then receives an amount calculated by multiplying this rate by the number of hours they worked.
For instance, say that three tip-eligible employees worked in one workday, and the total amount of tips was $220. Two employees worked eight hours and one employee worked six. You would divide $220 by 22 (the total hours all employees worked), which, in this example, equals $10. You then would multiply that amount by the hours worked to figure out each employee’s payout. The two employees who worked eight hours would each take $80 in tips, and the other employee would take $60.
Job-based or role-based tip pooling
Some tip pools are distributed by job or role. 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.For example, positions such as server or bartender may take 60-80% of the tips, while employees like a hostess or busser may take less.
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. For example, this could mean 40 points for servers, 20 points for bartenders, and five points for bussers.
Tips are added together, as are the number of points of the staff that worked. The tips are divided by the number of points in the pool to determine what each point is worth. To get the final tip amount per employee, multiply the number of points by that amount. In the example above, if three servers, two bartenders, and two bussers worked a shift, the total points would be 170. Say the total tips came to $340; each point would be worth $2, resulting in $80 for each server (40 points x $2), $40 for each bartender (20 points x $2), and $10 for each busser (5 points x $2).
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. The benefits of tip pooling can include incentivizing kitchen and back-of-house staff, increased teamwork and a collective effort to improve every customer’s experience, and an equal sense of responsibility for all business tasks, like side work or opening and closing duties.
However, there are some cons to tip pooling methods, depending on your employees’ preferences and the level of transparency you maintain as an owner. In some situations, tip pooling can lead to less motivated employees since tips will be distributed evenly at the end of their shift, no matter the quality of their work.
This can also affect seasoned employees versus new employees. Seasoned employees may feel as though they have to pick up the slack of newer employees to make the higher tip amounts they’re used to. It’s best to have an open dialogue with all of your employees to hear their thoughts about what works best in your business’s atmosphere and company culture.
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.
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. 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.
Please note that the information contained in this article is limited in scope and is only intended as a high-level overview of the topics discussed. The information is current as of the publication date only, and the laws (and associated agency and/or judicial interpretations) on the topics discussed could change at any point in the future. Block, Inc. (including its affiliates, subsidiaries, employees, officers, directors, attorneys, and tax advisors) undertakes no obligation to update this article for future changes in the law. In addition, laws vary by jurisdiction, and this article does not attempt to address all jurisdictions — for example, states, counties, or cities often have requirements that differ from federal law. Nothing in this article is or should be used as tax or legal advice. In particular, this article cannot be relied upon for the purposes of avoiding taxes, penalties, or other obligations under applicable law. For guidance or advice specific to your business, you should consult with a qualified tax and/or legal professional.
