Cash or Credit? Avoiding Tax Penalties on Gratuity Charges

June 7, 2017

You’ve served up a great meal. And the service was impeccable. The patron doesn’t think twice about leaving a 20% gratuity to show their appreciation to your staff. Whether it’s cash or added to the credit card receipt, you can bet the IRS is going to want to know about it.

Restaurant owners, managers, and even the staff must contend with complex compliance reporting due to the nature of this business. Tips, gratuities, and service charges, albeit a gracious way diners say “thanks,” are considered income, and therefore, are taxable wages. For those who attempt to withhold monetary information, steep penalties can be incurred – should it be proven that in fact, an excess of compensation via cash or credit has been accepted.

The Need for Hassle-Free Restaurant Reporting

Restaurant owners must account for revenue on the receipts, but also document an estimation of cash gratuities earned by staff. Often, they rely on each individual employee to disclose the amount they’ve earned during their shift. Manual calculation can be an arduous task plagued with errors, that takes time away from mission-critical services and responsibilities that impact customer satisfaction.

State-of-the-art technology, such as POS Bridge by Netchex, helps independent restaurants, restaurant management groups, franchises and chains alleviate the stress associated with IRS reporting. POS Bridge, an innovative, fully customizable product, seamlessly integrates with your current payroll and time and labor solutions to streamline HR compliance with the precision accuracy to file taxes on time and balance the books without computational errors.

Netchex gives restaurants the opportunity to automate tasks, generate accurate, up to the minute reports, and set up workflows that account for all revenue from hourly wages to service charges.

  • Calculation of tip pools
  • Alerts and shortfall tip reports
  • Calculation of percent of gross sales
  • Overtime wage calculations
  • Pay rate changes that per employee

Employing a system such as POS Bridge by Netchex, helps restaurants save money through calculated deductions as well. FICA tip credit allowances and assigning dollar amounts to the meals provided to employees who dine in during working hours, can lead to additional money-saving deductions for restaurant owners and managers.


Learn more about POS Bridge technology, and how Netchex partners with restaurants and franchises to provide a full suite of HCM solutions from recruiting and onboarding, to reporting and tax compliance, that are flexible and accessible for today’s mobile workforce.