For many service industry businesses — like restaurants, bars, and salons — tips can comprise up to 60% of employees’ salaries. But when it comes to cash tips vs credit card tips, the differences can impact everything from payroll processing to how your employees want to receive the tips they earn.
What you’ll learn
What you’ll learn
Updated: April 5, 2025
Key takeaways
- Cash tips give employees immediate access to funds, but may require additional effort for tax reporting.
- Credit card tips are automatically tracked and taxed in payroll software, but employees must wait to receive funds in their next paycheck.
- Choosing whether your business accepts cash tips, credit card tips, or both depends on workplace dynamics, taxation requirements, and employee morale.
Below, we break down the differences between cash tips and credit card tips, how they can impact your payroll, and strategies for effectively managing tips.
What is the difference between cash tips and credit tips?
First things first, we asked one of OnPay’s expert contributors and a small business accountant, David Kindness, to explain in the simplest terms how tips using cash or credit differ.
Cash tips and credit tips differ in two major ways: process and timing. Process refers to how the tips are collected, while timing refers to when the employee receives the tip income.
— David Kindness, CPA
Let’s quickly cover the differences:
| Cash tips | Credit tips | |
| Process | Cash tips are paid directly to employees, and there is no intermediary or go-between process. Employees must report all cash tips to the the employer, who will track them, include them in payroll reporting, and pay any payroll taxes or other withholdings on them. | Credit tips are collected by a point of sale (POS) system, like credit card reader, where the payment is processed and the tip is either manually or automatically recorded in the employer’s accounting system. The tips are then allocated to employees during the next payroll run, and are paid out on each employee’s next paycheck. |
| Timing | Cash tips are received by employees instantly, as soon as the meal or transaction ends. However, they are required to report the tips they receive to their employer. | Receipt of credit tips by employees is delayed because they must first be collected and recorded by the employer. They are then distributed in the employee’s next paycheck. Depending on the employer’s payroll schedule, it could take 2 weeks or more for employees to receive the tips. |
If you utilize tip pooling, it’s important to allocate both cash tips and credit tips according to your tip pooling process. Take a look at our guide to tip pooling article to learn more.
Now that we have the basics about these tip types down, let’s drill down a bit more into the details.
Cash tips vs. credit card tips
Most of the time, adding tips to a credit card purchase is convenient for many of your customers, but your employees may prefer getting tips in cash. Here’s why.
Immediate access to funds
One of the most significant differences between cash tips vs. credit card tips is in how quickly your employees receive their money. When customers leave cash as a tip, your employees get it immediately. For example, many restaurants pool tips and split them at the end of the shift or day.
Depending on the state, tipped employees can make less than half the legal minimum wage. So taking home cash immediately instead of waiting for their paycheck can be appealing for employees.
Unlike cash tips, credit and debit card tips are processed alongside sales transactions. Your customers add a tip to their receipt, paying the bill and tip together. While this ensures accurate reporting and documentation of tips in payroll software, employees must wait until their next pay period to access these funds.
Recordkeeping and tax implications
Credit card tips are easier to track when it comes to recordkeeping and taxes. When a server gets tipped via credit card, it is reported to the IRS as part of their earnings. However, cash tips require employees to self-report earnings on their personal taxes and also to their employer. As their employer, you must then include the declared tips in payroll accounting to pay Social Security and Medicare taxes.
The IRS states that if an employee gets more than $20 in tips in a month, they must report it. This begs a question that many people have, and once more, we posed it to David.
Do people actually report cash tips?
“The short answer is that it’s common for tipped employees to underreport their cash tips. However, it’s impossible to know exactly how common this practice is, or by how much tips are underreported each year. This is because there’s a lack of data on this issue — because it isn’t being reported.
Employees may underreport their tips for several reasons, whether unintentional or intentional. These reasons include forgetting to report cash tips, avoiding paying income taxes, or qualifying for benefit programs like welfare, rent, or food assistance (depending on the employee’s location and total income).”
— David Kindness, CPA
While underreporting cash tips may seem tempting at first, there are a number of important reasons why employees should declare their cash tips and report them to their employer. These include:
- Legality: intentionally underreporting cash tips constitutes tax fraud, and employees could face heavy fines or potentially even jail time if they’re caught.
- Lower unemployment: underreporting your tips can lead to lower unemployment insurance (UI) benefits down the road if you lose your job. This is because UI is calculated based on the income you reported and won’t include unreported tips.
- Lower worker’s compensation: similarly to unemployment insurance, workers comp will be lower if you get injured on the job and didn’t report cash tips, potentially leaving you covering the medical cost.
- Lower Social Security benefits: again, Social Security benefits are calculated based on your reported earnings and doesn’t include unreported cash tips. This may not seem like a big deal when you’re younger, but signifiant numbers of retirees rely on Social Security to pay their bills every month.
- Lower proof of income: if you need to show proof of income for something like a car loan, mortgage, credit card, or apartment rental, then underreporting your tips will lower your monthly income and jeopardize your eligibility for these big life events.
Since cash tips rely on honest reporting, there is a greater risk of employees underreporting to pay less taxes. This can lead to tax penalties for both your workers and your business if unreported cash tips and discrepancies come to light during an audit. However, cash tips now only make up less than 5% of total tips on average, so it isn’t as big an issue with the IRS as it has been in the past.
Credit card tips, on the other hand, are automatically recorded as part of the sales transaction, offering a seamless way for you and your employees to track tip income. This automation helps ensure you stay compliant with IRS requirements to properly report tip income.
Employee preferences
Given the pros of cash tips, most employees prefer receiving their tips in cash. With cash tips, employees get instant access to their money. In addition, there are no processing fees with cash tips, meaning employees receive the full tip amount.
While convenient for customers, employees won’t get credit card tips until their next paycheck. Due to credit card processing fees, your employees also may not receive the full tip amount. Employees who want to take home the full tip amount and don’t mind tracking and reporting their tip income often prefer cash tips.
While many employees prefer cash tips, they are legally responsible for properly reporting their cash tip income. They need to be organized and keep track of every dollar they receive in cash tips. Some employees may prefer the convenience of credit card tips, since the reporting is handled by payroll software.
Potential fees associated with credit card tips
Credit card companies charge a fee whenever a customer pays with a credit card. This reduces the amount of revenue your business brings in, and it may also impact your employees’ take-home pay.
Processing fees and their impact
Credit card transactions come with merchant processing fees, typically ranging from 2% to 3% of the transaction amount. Some businesses deduct these fees from employees’ tips to offset operational costs. However, doing so can decrease employee take-home pay and negatively impact morale.
Whichever method you choose, you should communicate clearly whether you will pass these fees on to employees to maintain transparency. You could also choose to pass the fees on to the customer and add it to their bill.
Effects on employee take-home pay
For example, if a customer leaves a $30 tip on a credit card and the processing fee is 3%, the employee may receive only $29.10 if the fee is deducted. While small deductions may seem minor, they add up over time and affect overall earnings.
To avoid this, some employers absorb the processing fees entirely, ensuring employees receive their full tip amounts and customers don’t get hit with unexpected fees. This policy can foster a positive work environment and improve employee retention. But this will impact your bottom line, so it’s important to balance employee morale with your net income.
Pro tip
It’s important to balance your business’s bottom line, your employees’ take-home pay & morale, and your customers’ satisfaction. Paying credit card fees yourself may hurt your bottom line, offloading them to employees will reduce their take-home pay and could reduce morale, and adding them to your customers’ bills could reduce their satisfaction with your business as most people dislike unexpected fees. It’s important to balance these factors to achieve the best outcome for everyone.
— David Kindness, CPA
The impact on service industry employees
Tips play a major role in your employees’ income, so it’s important to handle them properly.
Earnings potential
Tips — whether cash or credit card — play a crucial role in supplementing base wages for service industry employees. Accurate, timely distribution of tips can significantly enhance your employees’ financial stability.
If the processing fees are taken out of your employees’ tips, it will reduce their take-home pay, lowering their earnings potential.
Job satisfaction and retention
Your employees value consistent and fair handling of tips. With many businesses dealing with a labor shortage, keeping your employees satisfied is key to retention and reducing turnover.
Regardless of what policy you choose, you should be clear on tip distribution policies and get employee feedback. You can come up with a tipping policy that they are satisfied with, and they will feel like their opinion matters. Happy employees are more likely to stay with you and provide excellent service, ultimately benefiting your business.
Automating cash vs. credit card tip management can be a big help
Managing tips alongside other business operations can be challenging, so having a plan ensures employees receive their earnings properly. Cash tips provide immediate access to funds but can be trickier to track, while credit card tips simplify accounting but require you to absorb transaction fees. Almost all online payroll solutions can streamline tip management for small business owners in food service, hospitality, and retail. Whatever approach you choose, we hope it helps advance your business!
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.