February 7, 2025

What's the Best Way to Pay Employee Tips?

⏰ Est reading time: 7 mins

💡 What you’ll learn:

Three main factors to consider when picking a tip payout method: cost, compliance, and ease of use.
The pros and cons of different tip payout methods, from cash and paper checks to P2P apps and digital tipping solutions.
How to narrow in on the right digital tipping solution for your business.

What's the Best Way to Pay Employee Tips?

When it comes to finding the best way to pay employee tips, every business has different needs. One thing that remains the same, however, is the need to find a method that works for your company and your employees. In this comprehensive guide, we’ll explore what to consider when evaluating employee tip methods, the pros and cons of popular employee tip methods, and how to find the best choice for everyone involved.

What to Consider When Evaluating Tip Payout Methods

Whether you've been feeling like it’s time for a change—or you’re just setting up a tip payout method for a new business—here are three quick things to consider when deciding on a tip payout method.

Cost

Different tip payout methods have different associated costs, from cash handling (cash delivery services charge monthly service fees), to issuing paper checks. It’s important to ensure that the way you’re paying out employee tips isn’t adding another line item on your budget.

Compliance

The land of tip payout regulations is complex. Not only is it constantly changing, but it also varies heavily from state to state. It’s a good idea to make sure your employee tip payout method is one that aligns with state and federal tip payout laws, and that it provides a clear audit trail for tracking and verifying payments.

Ease of Use

If a method will require lots of extra administrative tasks for you, or require your employees to jump through additional hoops, it likely won’t last. The best programs and vendors are ones that fit seamlessly into your organization, helping you achieve more in less time—not creating additional hassle for you.

Different Employee Tip Payout Methods: Pros & Cons

With those factors in mind, it’s time to explore different employee tip payout methods and what they bring to the table. Whether you run a restaurant, spa, hotel, or any other business where you have tipped employees, there are no shortage of options to consider. Below are some of the most popular ways to pay employee tips, along with pros and cons for each.

1. Cash

For a long time, cash was king. It was fast, convenient, and easy. But in today’s world, cash comes with significant drawbacks. For one, consumers carry cash less often. This translates to less cash coming into your business, which then makes it harder to pay employee tips in cash at the end of each shift.

What was once a relatively simple process now may require multiple trips to the bank, possible use of cash delivery services, hours spent reconciling the till, potential theft and fraud, and/or stuffing envelopes at the end of the night. Phew! All of that hassle means you’re spending hours on paying out tips when you could be spending that time on things like employee training and enhancing the guest experience.

Pros:

Immediate access. Employees receive tips in hand at the end of their shift, allowing them immediate access their earnings.

Cons:

Time-consuming. Distributing cash can be tedious, requiring trips to the bank, till reconciliation, and envelope stuffing—hours that could be spent on other tasks, especially during busy shifts.
Lack of transparency: Tracking tips in cash can be difficult for businesses trying to maintain a clear and transparent system for taxation and payroll.
Security concerns: Handling large sums of cash could lead to theft or loss, posing security risks for your business.

2. Adding tips to paychecks

Incorporating tips into your existing payroll means tips are processed alongside an employee’s regular wages, usually via direct deposit or on the employee’s paycheck. But putting employee tips onto bi-weekly or even weekly paychecks creates additional administrative burden for you—and it isn’t ideal for your staff.
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One of the draws of working in an industry where you can earn tips is the immediacy of receiving that pay. Many industry professionals cite this as a reason they choose to work in hospitality. Without that immediacy, your staff is likely to lose motivation—and to look elsewhere for work—especially when roughly ¾ of working Americans want to be paid every day.

‍As CJ Dimino, Director of Restaurant Operations for Hop City Craft Beer & Wine notes, “You miss tips for even one day and all hell breaks loose. We’re in one of those multi-use developments—you’ve got restaurants, apartments, offices…any employee could go two doors down and get another job instantly if (they wanted).”

Pros:

Streamlined process: Tip distribution is seamlessly integrated into payroll, reducing administrative burden.

Cons:

Less immediate access: Employees may not appreciate the delayed access to their tips, as they only receive them on payday. This may cause cashflow problems; especially when many workers get into the hospitality business for the promise of faster access to earnings.
Payroll complications: Depending on your state or country’s laws, you may have to account for tip credit rules, overtime calculations, and other payroll intricacies related to tips.
Potential for confusion: Some employees may feel uncomfortable with their tips being processed along with their regular wages, especially if they have different tax withholding expectations for each.

3. P2P apps

If you’ve wondered: “can I send employee tips via apps like Venmo or CashApp?” the answer is, technically yes. However, it’s probably not your best bet.
Venmo and other peer-to-peer (P2P) apps are designed for payments between individuals—not for business transactions like paying employee tips. Doing so might subject your business to legal concerns, especially regarding tax withholdings and tip reporting.

‍Pros:

Ease of use. P2P apps are relatively easy to use and self-service.

Cons:

Not appropriate for business transactions. These types of apps, while convenient, are not intended for business payments such as sending employee tips, as they can leave you vulnerable to tax and legal complications.

4. Digital tip payouts

Fast, digital tip payouts have gained popularity in recent years, and for good reason. Directly depositing employee tips into bank accounts or digital wallets comes with a lot of perks, from saving businesses time and money to keeping employees satisfied with fast, convenient access to their earnings. Pros:

Efficiency: Employees receive their tips directly into their accounts, eliminating the need for cash handling.
Security: Employees don’t have to worry about carrying cash or visiting the bank to deposit it.
Clear audit trail. Digital tips can also be automatically tracked to easily verify who has been paid and when. Digital tip payouts provide a clear audit trail for sending, tracking, and verifying tip payouts
Cost and time savings. Instead of spending hours dealing with cash flow headaches—or spending money on cash delivery services or paper check issuing—digital payouts are typically a cost-effective solution

Potential drawbacks of digital tip payout solutions may only come to light when dealing with certain vendors–ones that may charge unnecessary fees, require prefunded accounts, or offer inadequate support. Read on to discover what to look for in a digital tip payout solution.

What to Look for in a Digital Tip Payout Solution

As you can see, embracing a digital tip payout solution comes with a lot of advantages. If you’ve decided to go digital, it’s important to do some comparison shopping to find the best option for your business and employees. Here are a few things to keep in mind when comparing digital tip payout solutions.

Find one without unnecessary fees

‍Sending fast, digital tip payouts should be cost-effective for your business and your team. Unfortunately, some digital tip payout solutions come with fees for both your business and employees. Examples include monthly fees for you, and everything from inactivity fees to ATM decline fees and overdraft fees for employees. These small fees can really add up—and it shouldn’t cost you or your employees money to send or access their tip payouts.

Branch’s digital tip payout solution strives to provide as many fee-free options as possible. We’re free for businesses, and we do not charge inactivity fees, ATM decline fees, overdraft fees, card replacement fees, or ACH transfer fees for employees. Nor do we have minimum balance requirements. We try to make financial services as accessible as possible to working Americans, and ensure that accelerating payments to your workers doesn’t end up costing them in unnecessary ways.

‍Avoid pre-funding

‍Some digital tip payout solutions require a pre-funded account to send employee tips. Unfortunately, this can create more work for you, especially if you have multiple locations. Imagine having to pre-fund an account for multiple locations or franchise units, all while trying to plan ahead for a busy weekend where your employees will see a surge in tips. It’s not an exact science, and if you don’t correctly predict how much money to hold in the account, some solutions charge you for emergency deposits to cover the amount.

It’s best to keep it simple with a solution that doesn’t require pre-funding at all. For example, Branch doesn't require pre-funding to send any payments. We front the money needed to pay workers and get reimbursed later on, instead of requiring you to hold money in a separate account to use our services. This translates to a streamlined, hassle-free tip payouts experience.

‍Look for a combined tip payout + paycard solution

‍Choosing a tip payout solution that also comes with paycards for employees is a wise way to offer your staff fast access to their earnings. Employees can use their paycard to track their earnings, spend, and save their money how they wish. When you choose a vendor like Branch, you’re providing a combined tip payout and paycard solution. You can send earnings—including wages, tips, and other payments—directly to employees’ Branch Cards, which are fee-free debit cards that come with digital banking. This allows your tipped employees to track their earnings, save, and spend directly from their account.

Choose a digital tip payout solution with a tip pooling partner

‍If your state allows tip pooling and you want to put it into place, it’s important to stay compliant while also keeping the process streamlined. One way to do this is to choose a platform that integrates with tip pooling software. For example, Branch partners with Gratuity Solutions to provide an easy way to integrate both tip pooling and digital tip payouts to your staff. Learn more here.

Want to Learn More About Employee Tip Payouts?

Through Branch?Branch allows you to send wages, tip payouts, mileage reimbursements, and other payments to employees after each shift—at no cost. You can also offer earned wage access to employees too, where they can request an advance of up to 50% of their next paycheck ahead of payday. Plus, Branch comes with financial wellness resources like personalized spending insights, a savings goal feature, and more to help employees manage their money.When you choose Branch, you’re choosing a seamless, comprehensive payments solution that works for you and your team.