How Your Credit Card Tips Get Into Servers’ Pockets

A lot has changed in the restaurant industry over the past decade, especially in the years following the Covid outbreak. At some restaurants, you may get a text when your table is ready. You may be able to swipe your card at the table or pay through a QR code. With all of these technological improvements, practices like paying and tipping in cash have fallen by the wayside.

While this may make the lives of customers considerably easier — or not depending on your opinion of apps and QR codes — how does the transition away from cash impact the restaurants themselves and their employees? One way that restaurants have adapted to this transition is to add servers’ tips onto their paychecks, rather than cashing them out at the end of each night.

“Because the amount of cash is not coming in — I’d say 95% of the tips that do come in are on credit cards — they are paid out weekly on a paycheck,” said Tell Jones, partner and operations manager at The Sink, a Boulder restaurant that has been in business since 1923.

The Sink has seen many changes in the restaurant industry over the past hundred years, including a transition to a tip pool. Jones said that this encourages servers and back-of-house staff to work together and creates more equity and less turnover. When they made the change to a tip pool, they also moved to a payout of tips in the staff’s weekly paycheck.

At The Sink, even cash tips are turned in at the end of the night and go towards the tip pool. Tips get split up based on the day and hours that a staff member works. Some restaurants that don’t have cash pools allow servers to pocket cash tips each night but must wait for their paycheck to receive the rest of their tips. This has come as an unwanted change for some working in the restaurant industry who are used to income each time they work.

“There was a little bit of push back, but it seems as if most restaurants are getting close to copying this type of tip pool as it’s just better for the business,” Jones recalled when The Sink first made the transition.

While some servers are still adjusting to this new way of receiving tips, there are protections in place to ensure servers are still being paid the true amount they are tipped. According to the Department of Labor, restaurants must pay servers all credit card tips no later than the next regular payday. They must do so even if the employer is still waiting for reimbursement from the credit card company.

And, while it is federally legal, Colorado restaurants may not deduct credit card processing fees from tips if they want to take advantage of the tip credit. The tip credit allows restaurants to pay employees $3.02 under minimum wage, as long as the combination of hourly pay and tips is at least equal to minimum wage. As this is often a larger financial incentive for restaurants, most choose to use a tip credit rather than deducting credit card processing fees.

Although this change may impact servers’ day-to-day flow of income, it should not impact their tax bill. Legally, any employee who makes over $20 a month in cash must report tips. They are responsible for keeping track of the amount earned in tips and paying taxes on that income regardless of whether it was received in cash or through their paycheck.

According to a Reddit thread posted several months ago, while it took many servers time to get used to the new process, they began to see some benefits once they adjusted. “I hated it at first, but now I’d never want to go back to walking with cash every night,” one commenter wrote. “It makes saving and budgeting much easier and keeps me from blowing tons of cash.”

Many commented that they have been able to get approved for apartments or other large purchases because of larger pay stubs. “It sucks for the short term to have to get used to paying bills in that fashion,” another commenter wrote. “But long term, it’s better for you this way if you’re going to be looking at any type of big purchases that you’ll need a loan for.”

So, like most changes, it has taken time to adjust. Next time you are tipping in Colorado, you can do it with peace of mind regardless if you opt for the traditional cash, credit card, or the more modern digital wallet.