If you are a business owner in the UK that receives tips from customers, then you need to know how to correctly record those tips in your payroll. Employees must pay taxes on their tips, so it is important to accurately track and account for them. This is particularly common for restaurants and other hospitality businesses.
In this guide, we will walk you through the process of recording tips in payroll, including how to enter them into Quickbooks and Xero. Let’s get started!
Do employees need to pay tax on tips?
Yes, employees must pay taxes on their tips. The tax rate will depend on their income bracket. This is because tips are considered taxable income. In the UK, the tax rates for income (including from tips) are as follows:
Cutting edge payroll software
- Powerful and easy to use
- HMRC & RTI compliant
- Used by payroll pros
The CRM platform to grow your business
- Great for entrepreneurs
- Powerful data analytics
- Manage sales and data
Powerful web builder and advanced business tools
- Great for startups
- Powerful web page builder
- E-commerce available
Supercharged content planning
- Great for marketing
- Better than lists or sheets
- Manage social media
Create a new website in 10 minutes. Easy.
- Launch your website fast
- Powerful data intuitive
- No coding skills needed
- 20% for those who earn less than £12,570 per year
- 40% for those who earn between £12,571 and £50,000 per year
- 45% for those who earn more than £50,000 per year
Use our tax and NIC calculator for more information.
Paying tips through payroll
If you want to pay your employees’ tips through payroll, you can do so by quickly opening a new bank account for tips. Then, when customers leave tips, they can be deposited into this account.
You will need to track the total amount of tips that are deposited into this account each pay period. When it comes time to run payroll, you can then allocate the appropriate amount of money to each employee based on their hours worked.
How to record tips in payroll
There are a few different ways that you can record tips in payroll. The most important thing is to make sure that all of the tips are accounted for and that the appropriate taxes are withheld.
| Method | Good to know… |
|---|---|
| Keep a running total for the pay period | One way to do this is to have each employee keep a running total of their tips for the pay period. At the end of the period, they can submit this total to you so that you can include it in their paycheck. |
| Use a tip jar | Another way to track tips is to set up a tip jar in your place of business. Customers can then drop their tips into the jar, and you can count them at the end of each shift. This method is often used in restaurants. |
| Declare tips on timesheets | A third option to record tips is to have your employees declare their tips on their timesheets. This can be a bit more time-consuming, but it does provide a more accurate record of tips. |
| Keep a record per customer | Or, you can have customers write their tips on their credit card receipts. You will then need to track these receipts and include the tips in your employees’ payslips. |
| Use a third party solution | Finally, you can use a third-party service to track and record tips. This can be a good option if you want to outsource the task of tracking tips. |
Remember, it is important to track and account for tips accurately in order to comply with government regulations.
Reporting tips on payroll
Do tips need to be shown as a line item on UK payslips?
Yes, tips need to be shown as a separate line item on UK payslips. This is so that employees can see how much money they have received in tips and so that the appropriate taxes can be deducted.
How to enter tips in Quickbooks payroll
If you use Quickbooks for your payroll, you can enter tips in a few different ways. The most common way is to add them as an additional income item on your employee’s paycheck.
- To do this, go to the “Income” section of the paycheck and click “Add/Edit.” From there, you can add tips as an additional income item.
- You can also enter tips in Quickbooks by creating a separate bank account for tips. To do this, go to the “Banking” menu and select “Accounts.” From there, you can create a new account for tips.
- Once you have created the account, you will need to link it to your employee’s paycheck. To do this, go to the “Paycheck List” and click on the paycheck that you want to link the account to.
- From there, click “Edit.” In the “Bank Accounts” section, select the account that you created for tips.
How to enter tips in Xero payroll
- First, you need your employees to declare how much money they have received in tips from customers.
- Once you have this information, you can enter it into Xero in a few different ways. The first is to add it as an ‘Other Payment’. To do this, go to the ‘Payroll’ tab and select ‘Add Other Payment’. From here, you can enter the amount of tips that your employee has declared.
- Alternatively, you can add tips as an expense. To do this, go to the ‘Expenses’ tab and select ‘Add Expense’. Then, simply enter the amount of tips that your employee has declared.