These days, most bar managers view accepting tips on credit cards as standard practice. Nevertheless, doing so means that there are certain obligations and rules that you need to follow.

Legal and regulatory compliance

The Fair Labor Standards Act (FLSA) lays out guidelines that affect tipped employees. In addition to this federal legislation, many states have their own laws. Follow the one that provides the most protection to your workers.

As a bar owner, remember that tips are the property of the employees who receive them. This also applies to tips from credit cards.

Under the FLSA, you can pay a lower wage to tipped employees as long as their tips bring them up to the federal minimum wage. This is called a tip credit. You are legally required to make up the difference if the worker’s wages and tips fail to meet the minimum hourly wage.

In most states, you can deduct a portion of the credit card processing fee from a credit card tip. However, this can only be a percentage equal to the transaction fee charged on the tip itself. This is illegal in California, Maine, and Massachusetts.

Payroll and tip distribution

As a bar owner, it is incumbent on you to keep detailed and accurate records of all tips received, including credit card tips. You also must keep track of how they are distributed. The point of sale system from your merchant provider can automate these tasks, enhancing accuracy and ease of retrieving details later.

Although some of your tips may be on credit cards that take longer to settle their payments to you, it is required that you pay tips to employees no later than their regular payday. You can’t hold onto tips while awaiting payment from credit card companies.

Some bars allow employees to put a portion of their tips in a pool to be shared. If you take a tip credit, only customer-facing employees can participate. If you do not take a tip credit, all workers can take part.

Tax obligations

All tips, both cash and those on credit cards, are considered income and are subject to federal income taxes. If an employee receives a tip of $20 or more via cash or credit card, they must report it to their employer by the 10th day of the following month.

As a bar owner, you are responsible for withholding income, Social Security, and Medicare from workers’ wages and tips. Use the W2 form to make these reports.

Form 941 is used to file tax returns on the wages, tips, and taxes you withhold. This must be done on a quarterly basis.

For most customers, credit cards have become the go-to way to pay. Naturally, they will want to add a gratuity to the bill in appreciation of the service they received from your staff. As long as you're familiar with the regulations and responsibilities related to tipping—especially credit card tipping—you can handle the process smoothly. This allows you to accommodate customers and fairly reward your staff with minimal hassle.