Many employees working in restaurant, valet and other performing services often receive tips and gratuities, which are subject to income tax. Tips and gratuities are the sole property of the employee to whom they were given, meaning they cannot be collected or received by the employer. Additionally, an employer cannot credit the employee’s tips and gratuities against his/her wages to satisfy wage requirements. Since tips are subject to income taxes, employees should report tips to their employers who may then make the appropriate deductions for said taxes on the next paycheck. Some employers attempt to deduct the actual tip amount from the hourly wages earned by each employee; however, this is illegal in the state of California.
There are a few downsides for employers when creating tip pools: (1) There may be less incentive for employees to work hard for their tips and gratuities when they know it will not go straight into their own pockets; (2) all employees who contribute to the patron’s service should be included in the tip pool, which other employees may not agree with; and (3) there is always a risk that the tip pool may later be determined unlawful. Conversely, not implementing a tip pool may cause some employees who do not receive tips and gratuities to demand a higher pay rate.
If patrons are permitted to pay tips by credit card, employees must receive their tip amounts no later than the next regular payday following the date the patron authorized the credit card payment. Employers must keep accurate records of tips and gratuities received, including those received by employees through a customer’s credit card. Additionally, costs of credit card charges incurred by the employer cannot be deducted from tips and gratuities paid by the customer on said credit card. Since the employer chose to use the services of the credit card company, the employer, not the employee, must bear the cost of using that service.