Today, many people walk around without cash in their wallets or without even wallets. According to the Pew Research Center, 41 percent of Americans say they don’t use cash in a typical week to pay for purchases. With cashless transactions being commonplace, it could be in the best interest of your bottom line to provide a variety of payment options. This would include getting a point-of-sale (POS) device that can process credit or debit card transactions. If you’re in a service industry, this would allow your employees to receive tips through other forms of payment besides cash.
When considering what is best for your small business and your employees, here are a couple of differences between cash tips and debit or credit card tips to keep in mind:
Keeping track of gratuity: Whether the employees’ tips are in cash or on debit or credit card receipts, it’s important to keep track of the tips, as you and your employees still need to pay taxes on that income. Also, if you want to claim a tip credit, then you’ll want to keep track of the tip amounts every customer leaves. A debit or credit card, since it’s electronic, helps document the tips more clearly for recordkeeping.
Timing: This can be important: When you or your employee actually receive their tips. If tipped in cash, employees can take that money home at the end of their shift. The amount due for credit card tips is typically paid through tipped workers’ checks on regular paydays.
Cash tips are received as they come in (e.g. in a tip jar or with a service bill). Once employees report tips, they can be used to validate an employer’s tip credits, and they can take the money home after their shifts.
The tip credit is when the total amount of tips is added to wages to equal at least the minimum wage. Keep in mind that only tip income and not service charges can be claimed for the tip credit. In addition, when there is tip pooling, the Internal Revenue Service (IRS), only allows the tip credit to be claimed on the tips an employee actually receives after the pooled tips are distributed among the traditionally tipped employees, such as waitstaff or bussers, which doesn’t include managers or supervisors, or other employees like dishwashers who don’t traditionally receive tips. (Note: If a tip credit isn’t claimed and employers pay at least the federal minimum cash wage, then employees who don’t traditionally receive tips can receive a portion of pooled tips.)
Keep in mind that there are more than a half dozen states that require employers to pay the full state minimum wage before tips. This chart lists those states, along with the amounts for minimum cash wages that are required according to different state laws across the United States. (This includes any differences in amounts for tipped food service workers—such as certain restaurant workers like servers, baristas in coffee shops, and food delivery workers—in certain states.)
States and US Territories That Require Employers Pay Full State Minimum Wage Before Tips | Minimum Cash Wage* |
Alaska | $10.85 |
California | $15.50 |
Guam | $9.25 |
Minnesota Small Employer (with annual gross revenue less than $500,000) | $8.63 |
Minnesota Large Employer (with annual gross revenue of $500,000 or more) | $10.59 |
Montana (not covered by the Fair Labor Standards Act—referred to as FLSA—with gross annual sales of $110,000 or less) | $4.00 |
Montana (with gross annual sales over $110,000) | $9.95 |
Nevada (employers who don’t provide qualifying health insurance) | $11.25 |
Nevada (employers who provide qualifying health insurance) | $10.25 |
Oregon (state minimum wage varies by region) | $14.20 |
Washington | $15.74 |
States and US Territories with Minimum Cash Wages Higher than the Federal Minimum Wage | Minimum Cash Wage* |
Arizona | $10.85 |
Arkansas | $2.63 |
Colorado | $10.63 |
Connecticut | $15.00 |
Connecticut – Hotels, Restaurants | $6.38 |
Connecticut – Bartenders who get tips | $8.23 |
Delaware | $2.23 |
Washington, DC | $8.00 |
Florida | $7.98 (on September 30, increases to $12) |
Hawaii | $11 |
Idaho | $3.35 |
Illinois | $7.80 |
Iowa | $4.35 |
Maine | $6.90 |
Maryland | $3.63 |
Massachusetts | $6.75 |
Michigan | $3.84 |
Missouri | $6.00 |
New Hampshire | $3.26 |
New Jersey | $5.26 |
New Mexico | $3 |
New York | |
New York – Tipped food service workers | $9.45 |
New York – Tipped service employees | $11.85 |
North Dakota | $4.86 |
Ohio – Employers with annual gross receipts of $372,000 or more | $5.05 |
Ohio – Employers with annual gross receipts of less than $371,000 | $7.25 |
Oklahoma | $2.13 |
Pennsylvania | $2.83 |
Rhode Island | $3.89 |
South Dakota | $5.40 |
Vermont | $6.59 |
Virgin Islands | $4.20 |
Wisconsin | $2.33 |
West Virginia | $2.62 |
States and US Territories with Minimum Cash Wages Equal to Federal Minimum Wage | Minimum Cash Wage* |
Alabama | $2.13 |
American Samoa | $2.13 |
Georgia | $2.13 |
Indiana | $2.13 |
Kansas | $2.13 |
Kentucky | $2.13 |
Louisiana | $2.13 |
Mississippi | $2.13 |
Nebraska | $2.13 |
North Carolina | $2.13 |
Commonwealth of Northern Mariana Islands | $2.13 |
Puerto Rico | $2.13 |
South Carolina | $2.13 |
Tennessee | $2.13 |
Texas | $2.13 |
Utah | $2.13 |
Virginia | $2.13 |
Wyoming | $2.13 |
*Amounts may change, so be sure to check for updates in your state.
What about credit card transaction fees?
Whether you pay your tipped employees’ credit card tips via cash or on their paychecks, many states allow you to deduct the employee’s share of the prorated amount of the credit card processing fee from each tip given as part of the credit card payment (i.e., the amount of the fee incurred to process the tip). However, in those instances, you can’t do that when the deduction makes the combined employee wages less than the applicable minimum hourly wage.
To see what the rules are in your state, check its Department of Labor website. As an overview, you can also refer to this chart with information shared by CardFellow:
State | Deducting prorated credit card transaction fees from total tips |
Alabama | Not explicitly allowed or not allowed |
Alaska | Not explicitly allowed or not allowed |
Arizona | Not explicitly allowed or not allowed |
Arkansas | Not explicitly allowed or not allowed |
California | Not allowed |
Colorado | Not allowed, but may not be able to claim tip credit |
Connecticut | Not explicitly allowed or not allowed |
Delaware | Unclear |
Florida | Not explicitly allowed or not allowed |
Georgia | Not explicitly allowed or not allowed |
Hawaii | Not explicitly allowed or not allowed |
Idaho | Not explicitly allowed or not allowed |
Illinois | Not explicitly allowed or not allowed |
Indiana | Not explicitly allowed or not allowed |
Iowa | Not explicitly allowed or not allowed |
Kansas | Not explicitly allowed or not allowed |
Kentucky | Unclear |
Louisiana | Not explicitly allowed or not allowed |
Maine | Not allowed |
Maryland | Not explicitly allowed or not allowed |
Massachusetts | Not allowed |
Michigan | Not explicitly allowed or not allowed |
Minnesota | Allowed |
Mississippi | Not explicitly allowed or not allowed |
Missouri | Not explicitly allowed or not allowed |
Montana | Unclear |
Nebraska | Not explicitly allowed or not allowed |
Nevada | Not explicitly allowed or not allowed |
New Hampshire | Not expressly prohibited or permitted |
New Jersey | Not allowed |
New Mexico | Not expressly prohibited or permitted |
New York | Expressly permitted |
North Carolina | Expressly permitted |
North Dakota | Not expressly prohibited or permitted |
Ohio | Not expressly prohibited or permitted |
Oklahoma | Not expressly prohibited or permitted |
Oregon | Not expressly prohibited or permitted |
Pennsylvania | Not expressly prohibited or permitted |
Rhode Island | Not expressly prohibited or permitted |
South Carolina | Not expressly prohibited or permitted |
South Dakota | Not expressly prohibited or permitted |
Tennessee | Not expressly prohibited or permitted |
Texas | Not expressly prohibited or permitted |
Utah | Expressly permitted |
Vermont | Expressly permitted |
Virginia | Not expressly prohibited or permitted |
Washington | Not expressly prohibited or permitted |
West Virginia | Not expressly prohibited or permitted |
Wisconsin | Not expressly prohibited or permitted |
Wyoming | Not expressly prohibited or permitted |
