Cash Tips vs. Credit Card Tips: What’s Reportable and What’s Not in 2025
If you run a restaurant, bar, or brewery, you already know that tips can get confusing fast. Some come in cash, others by card, and sometimes they get mixed up with automatic service charges on the bill. It’s easy to assume your POS and payroll systems are handling everything behind the scenes, but that’s rarely the case.
The IRS has very specific rules about what counts as a “reportable” tip, and with new updates in 2025, getting those details right matters more than ever. Whether it’s cash or credit, if it’s showing up in your POS, it needs to be reported.
Let’s walk through what’s changed, what needs to be tracked, and how to make sure both your team and your business stay fully compliant without adding more stress to payroll day.
How Tip Reporting Works In 2025
In the eyes of the IRS, a tip is a VOLUNTARY payment made by a customer directly to an employee; it’s not something automatically added to the bill. If an employee receives $20 or more in tips in a month, they’re required to report it to their employer, and the employer is then required to withhold taxes on that income.
The 2025 tax bill didn’t change that rule, but it did make reporting more rewarding for employees. Under the new law, tipped workers can now deduct up to $25,000 of reported tips from their taxable income. That means your team has more incentive than ever to track and report every dollar accurately, and you have even more reason to make sure your systems are doing it right.
Cash Tips: 100% Reportable (Even If They Never Hit Payroll)
Cash tips are often where reporting slips through the cracks. They’re easy to overlook because they’re paid directly to the employee, not recorded automatically in your POS or payroll system. But make no mistake: the IRS still expects those amounts to be reported.
Employees must record their total cash tips each month and report them to you by the 10th of the following month (Best practice is to have this process done at the end of each day). Once they do, those amounts become part of their taxable wages and you’re required to withhold taxes on them just like any other income.
If an employee doesn’t report their cash tips, they risk penalties for underreporting income and they lose the new 2025 tip deduction. As an employer, you could also face issues if your payroll records don’t reflect all the wages you’re required to withhold on.
For example, if a bartender earns $500 in cash tips and fails to report it, both you and the employee are technically underpaying payroll taxes and that’s exactly the kind of error the IRS looks for during audits.
Credit Card Tips: Automatically Reported, But Not Always Correctly
Credit card tips feel simpler because they’re processed through your POS. Those tips are collected by the business, passed through payroll, and automatically included on employee paychecks. But automation doesn’t mean accuracy.
Some systems treat automatic service charges as tips, say an 18% gratuity for large parties. But the IRS doesn’t as it isn’t voluntary. These service charges are considered WAGES, not tips, which means they need to be handled differently in your books and payroll.
Many business operators have switched to and utilize their POS platform’s payroll program because they were sold on its “simplicity” of transferring data between their 2 systems. However, If your POS is tracking both tips and automatic service charges correctly, it is most likely still not reporting it correctly as either wages or tips on your payroll as the mapping setup is often incorrect. You assumed it was, but we are here to tell you it is most likely wrong, as in our experience, about 10% of the time the tips vs gratuity mappings are set up accurately.
Cash Vs. Credit Card Tips: The Key Differences
Both types of tips need to be reported and both are equally taxable and need to appear on the employee’s W-2. The only difference is in how it’s collected.
|
Type |
How It’s Collected |
Who Reports It |
Payroll Treatment |
|
Cash Tips |
Given directly to employee |
Employee required to report monthly |
Added as tips wages once reported |
|
Credit Card Tips |
Processed through the POS |
Automatically recorded |
Included as tip wages automatically |
|
Gratuities |
Processed through the POS |
Automatically recorded |
Included as wages automatically |
What Happens If You Don’t Report Tips Correctly
If you fail to report or categorize tips accurately, there could be serious consequences.
- Employees who underreport tips may lose out on their 2025 deduction and face IRS penalties
- Employers who misclassify or underreport tips can be held responsible for unpaid Social Security and Medicare taxes
- In an audit, the IRS can issue a Notice and Demand under Section 3121(q), making you, the employer, liable for those back taxes, plus interest and penalties.
Here’s the part many owners overlook: it doesn’t matter if it’s cash or credit, if it’s in your POS, it’s reportable.
Your POS reports are the first thing the IRS will ask for in an audit and they MUST MATCH your payroll and financial records.
If an auditor runs your POS report and sees no cash tips at all, it raises an immediate red flag. They’ll assume you’re deliberately under-reporting or hiding income because no restaurant in America is operating without some level of cash tipping, especially if they see customer tabs in your POS paid with cash.
How U-Nique Accounting Helps Restaurants Track Tips Correctly
At U-Nique Accounting, we work with restaurants, bars, and breweries every day to make tip reporting seamless and compliant. Using Xero and integrated POS systems, we ensure that both cash and credit card tips are tracked properly, and that service charges are categorized and reported correctly on both your books and your payroll records.
That means fewer manual corrections, fewer IRS worries, and happier employees who can take advantage of the new 2025 deductions.
If you want to make tip tracking simple, book a free discovery call with our team today.
By MATT CIANCIARULO
