A 20% tip does not promise that 20% stays with the person who took the order. Restaurants often require a tip-out or a pool. Federal law allows valid pools and draws hard lines: the house and its managers do not keep employees' tips, and cooks can be included only in specific wage conditions. The reporting steps are the IRS section below.
Tip-out, pool, and service charge
Tip-out is the share a server turns over to other staff. It might be a percentage of sales, a percentage of tips, or a flat amount per shift. The guest does not see it. Tip pooling is the arrangement where tips are combined and redistributed. Sometimes the server hands cash to a busser at the end of the night. Sometimes the employer collects charged tips and pays them back out on payday. 29 CFR 531.54 treats both the amount a server keeps and the amount a busser receives as tips of the people who end up with them.
A service charge is not a tip. Publication 531 uses a compulsory 18% for parties of six or more, because the guest could not set the amount. Fact Sheet #15 agrees, and says sums paid out from it can count toward minimum wage. The guest-side version is the large-party guide.
Fact Sheet #15 and section 531.54 set no cap on a valid tip-out percentage. "Three percent of sales" is a house policy, not a statute. It is still illegal if it pays a manager, includes cooks while a tip credit is taken, or leaves your cash wage plus the tips you keep under the required minimum.
Who can be in the pool
The rule depends on whether the employer takes a tip credit. If it does, Fact Sheet #15 limits a mandatory pool to occupations that customarily and regularly receive tips. The fact sheet's examples are waiters, bellhops, counter people who serve customers, bussers, and service bartenders. Cooks and dishwashers are its examples of people who do not belong. The employer must tell you the required contribution, may take a tip credit only for tips you ultimately keep, and may not keep any tips itself.
If everyone is paid at least the full federal minimum in cash (currently $7.25 an hour) and the employer takes no tip credit, the pool may include people who are not usually tipped, such as cooks and dishwashers. Managers and the employer still cannot take from it.
Managers and supervisors cannot keep other people's tips whether or not a tip credit is taken. Fact Sheet #15 and Fact Sheet #15B define a manager as someone whose primary duty is management, who regularly directs at least two other full-time employees or their equivalent, and who has real weight in hiring and firing. An owner with at least a bona fide 20% equity stake who is actively managing is in that group. A manager may keep tips customers leave for service that manager alone provided, and may be required to put their own tips into a pool for non-managerial staff, but they cannot receive anything back from the pool or from a shared tip jar.
If the employer collects tips to run the pool, Fact Sheet #15 says they must be fully distributed by the regular payday for the workweek (or for the pay period in which that week ends). If the amount truly cannot be known in time, distribution is due as soon as practicable after that payday.
The tip credit and the cash wage
A tipped employee customarily and regularly receives more than $30 a month in tips. An employer taking a tip credit must pay at least $2.13 an hour in cash. The credit cannot exceed $5.12, the gap up to the $7.25 federal minimum. Only tips you keep count, and the employer makes up any shortfall for the workweek. It must tell you the cash wage, the credit, and that you keep your tips except for a valid pool. Notice can be oral or written. Without notice, the credit is not allowed. Overtime uses the full $7.25, not $2.13, and the credit on an overtime hour cannot exceed the straight-time credit.
The DOL tipped-wage table dated July 1, 2026 lists Alaska, California, Guam, Minnesota, Montana, Nevada, Oregon, and Washington as requiring the full state cash minimum before tips. Montana's full-rate line there applies to businesses with gross annual sales over $110,000. Where state law is more protective, follow the state. California Labor Code section 351 makes the gratuity the employee's property and bars crediting it against wages. The Bureau of Labor Statistics May 2025 median for this job was $16.94 an hour, including tips.
Credit-card fees
Fact Sheet #15 allows the employer to subtract the actual card-company fee and nothing more. Its example is a 3% fee, so the worker may be paid 97% of charged tips. A larger cut is a keeping violation. The deduction cannot pull pay under the minimum wage, and the tip is due on the regular payday, not when the card company reimburses the house.
California Labor Code section 351 forbids that fee deduction and requires the full tip the patron wrote, by the next regular payday.
What you report to the IRS
Publication 531 tells employees to keep a daily tip record, report tips to the employer, and report every tip on the tax return. Cash, charged tips, pool shares, and noncash items all count. Under $20 from one job in a month is not reported to that employer, but it still goes on the return. At $20 or more, report by the 10th of the next month, or the next business day if the 10th is a weekend or holiday. Report what you keep, not what you passed on. A missed report can add a penalty of 50% of the Social Security and Medicare tax due on those tips. The publication points to Form 4137 for the employee share. Forms 4070 and 4070A are historical.
Allocated tips are separate. Large food or beverage employers may allocate enough so reported tips reach 8% of certain sales (carryout and sales with a service charge of 10% or more are excluded), or a lower IRS-approved rate not below 2%. That amount is box 8 of Form W-2, not box 1. Add it unless your records show you received less. Do not also diary a service charge already paid as wages. The IRS tip page says that charge is not eligible for the qualified tips deduction.
A labeled example, not a standard rate
These numbers are a made-up house policy so you can see the arithmetic. They are not a national standard.
Guest leaves 20% on $100 of sales
The guest's tip is $20. Suppose the house requires the server to tip out 3% of sales to bussers ($3) and 1% of sales to the service bartender ($1). The server keeps $16 of the $20. The guest sees 20%. The server's own tips from this check are 16% of sales, and the busser and bartender have tips of their own. Under Publication 531, the server reports the $16 they kept, not the $4 they passed on. The coworkers report what they received.
If a paycheck looks wrong, write down sales, tips, tip-out, and the cash wage, then use Fact Sheet #15. Its helpline is 1-866-487-9243. A legal tip-out is not a reason for the guest to shrink the percentage in the restaurant guide.
Matt Totty publishes this on TipSlice as general information, not legal, tax, or wage advice. Fact Sheet #15 says the same about itself. Use the agency pages for a specific paycheck.
Sources
- U.S. Department of Labor, Fact Sheet #15 — tip credit, traditional and nontraditional pools, managers, card fees, service charges, and payday distribution.
- U.S. Department of Labor, Fact Sheet #15B — when a manager may keep a tip, and when they may not.
- 29 CFR 531.54 — tip pooling, and the statement that the FLSA sets no maximum contribution percentage.
- U.S. Department of Labor, Minimum Wages for Tipped Employees — state cash wages, table dated July 1, 2026.
- California Labor Code section 351 — gratuities are the employee's property; no card-fee deduction from tips.
- IRS Publication 531, Reporting Tip Income — daily records, the $20 threshold, pools, allocated tips, and service charges.
- IRS, Tip recordkeeping and reporting — service charges versus voluntary tips.
- Bureau of Labor Statistics, Waiters and Waitresses — May 2025 median wage, including tips.
More from TipSlice
What guests are deciding at the table is in how much to tip at restaurants and large parties and automatic gratuity. The guides hub lists the rest. The calculator link above is only the guest's side of the check: TipSlice does not compute a house tip-out, because that formula is the employer's and it is not one number nationwide.