Customers who pay by credit card choose to add a tip to the credit card transaction (instead of leaving the tip in cash). We have a liability account titled “Accumulated Tips” where all tips are stored.
When we run payroll, we distribute these accumulated tips to the employees proportionally based on the number of hours each of them worked during the pay period.
Currently, a journal entry is created debiting “Accumulated Tips” and crediting an income account.
The problem is that these tips should NOT be included in gross sales (since no product was sold; the employer is merely acting as agent, collecting the tips on behalf of his or her employees).
But tips are taxable so we need to withhold taxes from employees on their payslips.
We created a Payslip Item titled “Tips” (in addition to regular wages).
We are looking for a way to separate this “Tip income” from gross sales volume. This is because the local authority requires us to pay “business privilege tax” based on our gross volume. We feel we should not have to pay business privilege tax on the tips portion of the income, since we are not selling anything but are merely collecting the tips as a service to our employees.
Any suggestions on how this could be done, preferably NOT on the P&L side?