How does tip pooling work?

Tip pooling can get pretty complicated. Not to mention, many states have different laws and requirements on the matter. Be to work with a CPA or local expert to make sure you’re compliant, but to get you started, here are initial steps you can take to introduce tip pooling at your business.

  1. Visit your state’s Department of Labor website to make sure that tip pooling is allowed in your state. Some states do forbid or have strict limitations.
  2. Create a tip pooling policy that is compliant with your state. Make sure the policy details how much of each tip must be contributed to the pool as well as when, and to whom, the pool will be paid out.
  3. Inform all employees of your tip pooling policy.
  4. At the end of each work shift, collect the money and then split the pool up between all the tipped employees who worked during that time.

One important note for employers: you can only take a tip credit for the amount that a tipped employee actually receives after contributing to the tip pool.

Who can take part in a tip pool?

Currently, only tipped employees can take part in a tip pool. That means that other workers, like cooks, dishwashers, and cashiers, cannot take part. In addition, management cannot take part in tip pooling either.

Heads up: On December 5, 2017, the US Department of labor proposed a change to the tip credit rules that affect tip pooling. This change would allow non-tipped workers to participate in tip pooling. For full details, visit the fact sheet put out by the DOL.

Be sure to keep an eye on this proposal as it may affect the rules around tip pooling if and when passed.

As always, please be sure to consult a tax, payroll, or HR expert to ensure your payment and management practices are compliant with your state and beyond.

This article provides general information and shouldn’t be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult a CPA or tax advisor for advice specific to your business.