If you run a small business where the employees rely on tips to make up part of their income, such as a restaurant or coffee stand, you need to understand how the process works when your employees are tipped via a credit card or debit card. It is important that you follow federal law when giving employees their debit and credit card tips in order to ensure that you do not come in violation of federal payroll standards.
#1 You Can Minus The Transaction Fee
When a tip is run on a credit card, you are allowed to take away the transaction fee from the total of the tip. For example, if the transaction fee for running the credit card is $1.00 and the tip was $10.00, you only have to pay your employee $9.00, which is the amount of their tip minus the credit card transaction fee. However, since you are presumably also being paid off the credit card transaction, you can also split the transaction fee. In that case, with a $1.00 transaction fee and a $10.00 tip, the employee would get $9.50 of their tip. Or, you can deduct the portion of the transaction fee based on the total of the bill. For example, if the total bill was $100, and the tip was $10, the tip made up 10% of the total bill, thus you would deduct 10% of the transaction fee from the tip or .10 cents. That would leave your employee with $9.90.
Just make sure that the way that you deduct transaction fees is consistent for the entire year and for all employees.
#2 Limits On Transaction Fee
However, you also need to keep in mind that there are limits on how much the transaction fee can actually be. If the transaction fee is so large that it causes the employee, when combining their tips and paid wage, to fall below minimum wage, you cannot take out that much money. For example, if are paying your employee the minimum per hour, and using tips to meet the federal minimum wage, if taking out the transaction fee brings the total your employee made per hour below the required federal minimum wage, you cannot take that amount out of their paycheck. Your employee has to make federal minimum wage one way or another.
#3 Can't Withhold Tips
You can't withhold paying out your employees their tips from credit and debit card transactions beyond their next or normal payday. For example, if you issue paychecks every Friday for work done the previous week, all tips issues via credit or debit card the previous week have to be paid out to your employee's check by that Friday.
You cannot withhold your employees the tips amount that they earned on the last pay period on their next paycheck, even if you are still waiting on the credit card company to issue you that money. You have to give your employees that money in a timely manner, which is why you should keep some extra cash in your accountants at all times.
If you have questions about how to handle tips on credit or debit cards or any other questions in regards to how payroll services work for tipped employees, you should consult with a payroll attorney for advice.