Jun 10, 2022

Tips On Accounting: Accounting For Tips

Does gratuity, a.k.a. tipping, have a place on your business’s invoice? If not, you might be missing a chunk of change, if you’ve set up shop in a culture where it’s commonplace, like the U.S.

I saw this first hand back in the old days when you could still travel somewhere. I landed in Heathrow airport and headed to a bar to wait for my travel mates on different flights. This being my first time to Europe, I ordered a local British beer (it was a Carling, so nothing to write home about) and fished out a dull one pound coin to leave as a tip.

As I was leaving, the bartender waved me back and told me that you don’t have to tip this much in London; that at most, you’d just leave the change you got back after paying for a pint. Working at the airport bar, he must have given that advice hundreds of times to confused American tourists. But that man is a hero, because he probably saved thousands of US travelers some hard-earned money by illuminating us on the local tipping culture (or possibly a villain, if you’re a server working in London restaurants) because we Americans are accustomed to tipping.

Which leads me back to my original question: are you providing your own customers an option to tip?

Accounting For Gratuity

Simply adding a tip line may not be a windfall for your business, but you never know until you try! After all, tipping culture is so ingrained in the U.S. that it even has its own set of complicated tax codes (so you really know it’s American) that we should probably discuss.

Do you need to report tips to the IRS? You bet, for any monthly amount exceeding $20. In fact, tips are really no different than standard income:

All cash and non-cash tips received by an employee are income and are subject to Federal income taxes. All cash tips received by an employee in any calendar month are subject to social security and Medicare taxes and must be reported to the employer.IRS

In fact, the IRS wants employees to keep a daily record of tips received, along with a record of the date and value of any noncash tips (ie. tickets, passes, etc). The cash tips can be recorded on Form 4070A. Whew, that is definitely a chore and another reason why this sort of bookkeeping is better left to automation.

Gratuity With Online Payments

While most people who work in the service industry get their tips on-site in the form of cash or card (ie. restaurant workers, hair stylists, delivery drivers, valets, exotic dancers, etc.), there are many freelancers and contractors who do most of their transactions online after sending out invoices, usually after the fact.

These workers include wedding photographers, tutors, instructors, nurses, freelance writers (ahem), and a wide range of consultants. Nearly anyone who can be hired through sites like TaskRabbit or The Mom Project may accept gratuity for services well-rendered.

But because cold hard cash isn’t involved, workers are often seeing a decline in gratuity. According to a recent report, tipping is down since 2019 and one of the reasons cited is the decline of using cash:

One reason tips may be decreasing is due to more businesses using online apps to make appointments and accept payments. When customers pay with cash, they tend to tip more. Many online payment services calculate tips based on percentages, which might be lower than the amount most people would generally think to tip for a service.

One barber who spoke with The Wall Street Journal explained that a customer who usually tipped heavily for haircuts recently made their first payment through the business’ new app. The tip was only a third of what they would normally give.

In a strange way, while online payments are so much easier, it has created a hurdle to tipping culture.

Luckily, tech is evolving to make it easier. To facilitate including gratuity on online payments, bookkeeping apps — Sunrise in particular — have built-in a gratuity option on online invoices.

Now service workers can allow for tips right from their invoices, not only making it easier for their clients to send them tips, but also automatically logging it in their books for easier accounting.

The Psychology Of Gratuity

Having the option baked into the invoicing adds a psychological component as well. Without the option, a client would have to go out of their way to provide a bonus to the worker when paying an invoice online. Now with this option, it’s like having a tip jar at the counter: just having it there is half the battle.

According to research from honeybook, “self-employed creatives who prompt tipping are 50% more likely to be tipped,” and can stand to earn an additional $4,558 per year. Yet 76% don’t ever ask for tips.

And that is understandable because it can be an awkward conversation. Instead, simply having a gratuity option can be the “ask” needed to inspire generosity. Also keep in mind that freelancers usually won’t ever have forced tipping, such as the automatic gratuity you’d find at many restaurants. In the case of photographers, artists, and developers, the client will understand that tipping is reserved for excellent work. Knowing this should put less pressure on the worker when considering enabling tipping on their invoices.

Want to get tips on your invoices? Try Sunrise for all your invoicing and bookkeeping needs today!

About the author

Robert Woo
Robert Woo is a freelance writer & marketer who has been running his business with Sunrise for more than a decade. He focuses on the tech and finance industry, has been a featured contributor of Lendio, and regularly shares his experience with software via blogs and articles. During any remaining free time, he’s obsessing over fantasy football, writing for television, and playing guitar just enough to maintain the calluses on his fingers.


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