Tips collected by employer to distribute to employees

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?

I don’t think that a journal entry allocating the tips to income is required. Payment of the payslip including the tip should be set up to clear the Accumulated Tips account.

What you “feel” is irrelevant. What matters is whether local tax regulations classify such tips as gross income of the business, which would subsequently be offset by the wage expense of distributing tips to employees. But that is unrelated to Manager.

You can handle such transactions quite easily with the program. Simply break the receipt into two lines, one for the items sold (posted to an income account) and the other for the tip (posted to the Accumulated tips liability account).

But I am wondering how you record these receipts now?

As for how you clear everything, a payslip earnings item can only be posted to an expense account, not a liability account. So your journal entry each payroll cycle should debit Accumulated tips and credit whatever expense account you post wages to. Or, if you want to keep your company-paid wages separate, you can create a Tips earnings expense account that will get zeroed out each payroll period by the journal entry.

Thank you!