How do I record income from tips added via card payments?

Understanding what “tips added via card payments” really means

When customers add a gratuity to a card payment—whether on a restaurant terminal, a salon booking system, a taxi card reader, or an online checkout—the tip becomes part of an electronic transaction that is recorded by your payment systems. From an accounting perspective, that’s helpful because it creates a clear trail: a timestamped payment, a captured amount, and often a breakdown between “sale” and “tip.” From a practical perspective, it can also be confusing, because the money doesn’t always land in your bank account the same way, and the tip might not belong to the business in the same sense that the sale does.

That’s why recording card tips properly starts with one key question: are the tips legally and practically yours as the business, or are you holding them on behalf of staff? Many businesses are essentially “passing through” tips to workers, while others operate service-charge models where amounts are business revenue first and then distributed later as wages or bonuses. Card tips can look identical on a customer receipt, but the bookkeeping treatment can be very different.

This article walks through a practical, systems-friendly way to record tips added via card payments, including how to handle processor fees, timing differences, payout methods, payroll, and reporting. The goal is simple: your books should match reality, your bank deposits should reconcile cleanly, and your staff tip records should be consistent and defensible.

The big fork in the road: tips vs service charges

Before you post anything to your ledger, confirm whether the amount is a true “tip” (a voluntary gratuity controlled by the customer and typically belonging to employees) or a “service charge” (a mandatory or automatically applied amount that is usually business revenue, even if you later share it with staff). Many point-of-sale (POS) systems label both as “gratuity,” and customers may not appreciate the difference, but your accounting needs to.

As a rule of thumb in day-to-day bookkeeping: if the customer chooses the amount at checkout and you are simply collecting it through the card network to pass to staff, treat it as tips held for others (a liability) until you pay it out. If the amount is automatically added (for example, “12.5% service charge” on parties of six or more), it’s safer to treat it as business income and then treat later staff payments as payroll/wages/bonuses, depending on how you distribute it. When in doubt, check what your receipts display, how your POS describes the line item, and how you communicate it to customers.

Because the user question is specifically about “tips added via card payments,” we’ll focus on the common scenario: discretionary tips that ultimately go to staff. We’ll still cover the service-charge scenario because many businesses blend both.

Core principle: separate “sales revenue” from “tips collected”

One of the most common mistakes is recording the entire card receipt total (sale + tip) as sales revenue. That inflates revenue and makes margins look better than they are, and it can also create tax and payroll confusion. Clean accounting keeps the sale and the tip distinct.

A simple chart-of-accounts setup that works for many small businesses looks like this:

Income accounts: Sales revenue (by category if you like).

Liability accounts: Tips payable (or Tips held for employees).

Expense accounts: Merchant processing fees (card fees), and possibly “Tip shortage/overage” for minor reconciling differences.

Asset accounts: Bank account, and optionally “Undeposited funds” if you use it for batching deposits.

This structure lets you post the customer’s sale as revenue, post the customer’s tip as a liability, and later clear the liability when you pay tips to staff.

Recording the transaction: what to do on the day of the card sale

Let’s start with the basic case where a customer pays by card and adds a tip at the terminal. Suppose the customer’s food total is 50.00, they add a 10.00 tip, and the card charge is 60.00.

If your system posts daily sales automatically (many POS integrations do), you want your accounting entry to reflect the economic reality:

Debit: Card clearing / Undeposited funds / Payment processor receivable — 60.00

Credit: Sales revenue — 50.00

Credit: Tips payable — 10.00

The “card clearing” account name varies. Some businesses treat the payment processor as a short-term receivable: money owed to you until the processor deposits it. Others use “Undeposited funds” to group batches before matching bank deposits. Either approach can work; the key is that you have an asset account where the gross receipt sits until settlement.

Why gross and not net? Because your bank deposit will often be net of processing fees, or it may combine multiple transactions. Tracking gross receipts gives you a clean base for reconciling to the settlement report.

Handling card processing fees without distorting tips

Fees are where many books get messy. If you record only the net deposit, you lose visibility into fees and you may inadvertently reduce tips payable in your books. You generally want fees to be a business expense, not an employee cost, unless your policies and local rules explicitly allow tip deductions and you’ve configured payroll accordingly.

Assume the processor charges 1.80 in fees on this transaction and deposits 58.20 into your bank account. There are two clean ways to record this:

Method A: Record gross receipts, then record fees when the deposit hits

On sale day you recorded the gross 60.00 into the clearing account. When the bank deposit arrives:

Debit: Bank — 58.20

Debit: Merchant processing fees — 1.80

Credit: Card clearing / Processor receivable — 60.00

This method keeps the settlement step separate and usually matches processor reports well.

Method B: Record net deposits and fees together in a single entry

If you don’t track a clearing account and instead post directly to bank, you can still do it correctly, but you must capture gross somewhere. A single combined entry might be:

Debit: Bank — 58.20

Debit: Merchant processing fees — 1.80

Credit: Sales revenue — 50.00

Credit: Tips payable — 10.00

This works if each deposit corresponds neatly to one transaction or one batch you can identify. In practice, deposits often lump many transactions, so the clearing-account method tends to make reconciliations easier.

Should processing fees reduce the tips payable?

From a clean bookkeeping perspective, no: your liability to employees is the tip amount the customer intended, not the tip amount minus fees, unless you have a policy of withholding a portion of tips to cover the card fee and you are legally permitted to do so. Many businesses do not deduct fees from tips, even where it is allowed, because it complicates payroll and can create employee relations issues.

If you do deduct fees from tips, you must be consistent, transparent, and aligned with employment rules and payroll reporting. In that scenario, you would record the tip payable at the net amount you intend to pay, and the withheld portion might be treated as a reduction in fee expense or as another income/offset line. But be careful: a “tip fee” is still money that came from the customer intended for staff. Whether you can retain part of it is a policy and compliance question, not just an accounting one.

When staff receive tips immediately vs later

The timing of tip payout drives the bookkeeping steps. There are three common patterns:

1) Tips paid out in cash from the till daily. In many venues, employees walk out with their tips in cash even when customers tipped by card. That means the business is using its cash to pay tips before the card-tip money hits the bank. The liability still exists, but it is settled quickly.

2) Tips paid out through payroll. This is increasingly common because it creates a tidy record. Tips are accumulated, then paid to employees on a scheduled payroll run.

3) Tips paid out via separate bank transfer (not payroll). Some businesses run weekly transfers labeled “tips” to employees. This is simpler than cash but can be messy if it bypasses payroll reporting requirements.

Whichever pattern you use, you want your ledger to show: tips were collected (liability increased), then tips were paid (liability decreased), and the cash/bank movement matches.

Example: paying card tips out in cash from the till

Using the earlier numbers, you have 10.00 in tips payable on the day of sale. If you pay the employee 10.00 cash from the till that same day, the entry to clear the liability is:

Debit: Tips payable — 10.00

Credit: Cash on hand — 10.00

This reflects reality: you reduced the cash in your drawer by paying staff, and you no longer owe them the tip. Later, when the card settlement deposit comes in, it will replenish the overall cash position in the bank, but it won’t affect the tips payable (because you already cleared it).

One caution: if you do this frequently, you need disciplined till controls. Cash payouts can blur the line between “cash variance” and “tip payout,” so make sure the POS end-of-day report lists tips due and tips paid, or maintain a simple log.

Example: paying card tips through payroll

When you pay tips through payroll, the core accounting entry is the same: reduce the tips payable liability and reduce cash/bank when you pay. If payroll software handles the payment, the journal entry might bundle wages, taxes, and tips. In concept, you want tips to clear the tips payable account rather than being included as a wage expense (unless you treat tip distributions as wages in your system).

A simplified entry on payday for tips portion only might be:

Debit: Tips payable — 200.00

Credit: Bank — 200.00

If your payroll journal entry includes tip payments inside a “Payroll clearing” process, the important thing is mapping: tips should be posted against the tips payable liability, not to sales revenue and not to a wage expense account that would double-count.

Example: paying tips by bank transfer outside payroll

If you pay tips weekly by bank transfer to staff (separate from payroll), you still clear the liability:

Debit: Tips payable — 200.00

Credit: Bank — 200.00

The risk is not the bookkeeping; it’s compliance and reporting. Tips are often taxable income to employees, and many jurisdictions require that tips be tracked and reported through payroll. Even where bank transfers are allowed, you still need robust records of who received what, and when.

Reconciling your books to POS and processor reports

To keep tip accounting painless, build your process around reconciliation. You typically have three sources of truth that must agree over time:

POS sales reports showing sales totals and tip totals by day, shift, terminal, and sometimes employee.

Payment processor settlement reports showing gross card receipts, fees, chargebacks, and deposit amounts.

Bank statements showing what actually landed.

A strong workflow looks like this:

Step 1: Use the POS to capture daily totals: sales and tips separately.

Step 2: Post daily sales as sales revenue and tips payable (gross), and post the gross card receipts to a clearing account.

Step 3: When deposits come in, match them to settlement batches and record fees as expenses, clearing out the receivable.

Step 4: Pay tips to staff and clear the tips payable account.

At month-end, your tips payable balance should represent tips you have collected but not yet paid out. If it’s huge and you believe you’re paying tips out regularly, something is wrong (usually tips were posted as revenue or payouts were posted to the wrong account).

Dealing with delayed settlements and batching

Card transactions often settle in batches: the processor might deposit one combined amount per day, per location, or per merchant account. Sometimes deposits arrive a day or two later. If you try to post individual sales directly to bank, you will spend a lot of time hunting for matches. A clearing account makes the delay irrelevant: you book the sale on the date of the sale into clearing, then clear it when the money arrives.

In a batch environment, you can also post summarized entries rather than individual transactions. For example, you might post one daily journal entry based on the POS “end of day” report:

Debit: Card clearing — total card takings (sales + tips)

Credit: Sales revenue — total sales

Credit: Tips payable — total tips

Then later clear deposits and fees when settlement reports show the exact net deposit and fees. This is often the sweet spot for small businesses: accurate without being painfully granular.

What if tips are split among multiple employees?

Tip pooling and tip sharing don’t change the core accounting. The business still collects the total tips and owes the total tips. The split is an internal allocation question: who gets what portion. From a ledger standpoint, the tips payable account is a total liability.

However, you should maintain a secondary record that shows tip allocation per employee per pay period. Many POS systems produce “tips by employee” reports, especially when employees clock in and out and are assigned checks. If you pool tips, you may have a house rule for distribution (hours worked, points, role-based percentages). Your payroll system might also need the per-employee allocation for reporting.

Accounting systems usually do not need to store that level of detail in the general ledger; they need totals that reconcile. The detail can live in POS exports, payroll reports, and your tip distribution worksheets.

How to handle tips for owners, contractors, and non-employees

In some businesses, tips may go to people who are not traditional employees (for example, independent stylists in a shared salon space, or contractors in a delivery setup). The principle remains: if the tips do not belong to the business, they should not be sales revenue. The payment is still a liability until paid out.

The difference is in how you document the payout and any required tax reporting. You may need to issue remittance statements or other documentation. Even if the accounting entry is “Debit tips payable, credit bank,” your supporting records need to show the recipient, date, amount, and the basis for the amount.

Online tips: checkout tips, delivery platform tips, and QR ordering

Card tips can show up in online contexts too: an e-commerce checkout “add a tip,” a QR menu checkout, or a delivery link. The same accounting logic applies, but there are extra wrinkles:

Platform-held tips. Some platforms collect tips and pay them out directly to workers or to you in a separate payout. In that case, you may never see the gross tip inside your merchant deposit.

Separate settlement streams. Tips might settle on a different schedule from sales, or appear as separate lines in a settlement report.

Different fee structure. The platform might charge a different fee on tips or a blended fee that covers multiple services.

To record these cleanly, you need to map each payout stream. If tips are included in your payouts, record them as tips payable at the time of sale (or at the time you become aware of the amounts) and clear them when you pay staff. If tips are paid out by the platform directly to workers, then you may not record tips payable at all—because you were never the party holding the tip liability. Instead, you might simply record sales net of platform commissions, depending on your arrangement. The key is to follow the flow of funds and the legal responsibility.

Refunds, voids, and chargebacks involving tips

Refunds are where tip accounting can become surprisingly tricky. Sometimes a refund reverses the entire transaction including the tip. Sometimes it reverses only the sale portion, leaving the tip intact (particularly if staff already received the tip and the customer is only disputing the sale amount). Sometimes a partial refund is issued. Sometimes a chargeback arrives weeks later and includes the tip.

To keep this manageable, treat refunds as reversals of what you originally recorded, using the same accounts. For a full refund of our earlier example (sale 50.00, tip 10.00):

Debit: Sales returns/refunds (or reduce Sales revenue) — 50.00

Debit: Tips payable — 10.00 (or reduce tips payable if not yet paid; if already paid, you may need a different approach)

Credit: Card clearing / Processor receivable — 60.00

If the tip was already paid to the employee, you no longer have a tips payable balance to reduce. In that case, you have choices that depend on your policy: you might absorb the cost as a business expense, or you might recover it from future tips if your rules allow. Accounting should reflect what actually happens: if you absorb it, post the tip portion to an expense account (for example “Refunded tips expense”) rather than trying to reduce a liability that is already settled.

Chargebacks work similarly but may include additional processor fees. You’ll often see a debit from the processor for the disputed amount. Record it against your clearing/receivable account, and ensure the sales and tips components are reversed or expensed appropriately. The main goal is that your clearing account reconciles to processor statements over time.

Rounding differences and “tip variance”

Card tips can generate small differences due to rounding, currency conversion (if you accept multiple currencies), or system timing. If your tips payable account doesn’t match your POS totals by a small amount, don’t ignore it—track it.

A practical approach is to create a tiny “Tips variance” expense (or income) account and use it only for immaterial differences you can’t otherwise attribute. If differences grow, it signals a system or process issue: mis-keyed tips, missing settlements, duplicated imports, or payouts posted to the wrong place.

Cash tips vs card tips: why they’re recorded differently

Even if your question is about card tips, it helps to contrast cash tips because it clarifies why we use a liability for card tips. With cash tips, the customer gives money directly (or leaves it) and the employee might keep it immediately. In that scenario, the business may never “hold” the tip, so it may not appear in the business bank or cash drawer in a way the business controls.

Card tips, however, usually flow through the business merchant account, which means the business receives the money first—at least briefly—before distributing it. That creates the “tips payable” liability in the middle.

If you do collect cash tips into the till and then pay out later (less common but possible), then you would also treat those as a liability, similar to card tips, because you are holding the cash on behalf of employees.

Setting up your POS and accounting software for clean tip tracking

If you want this to run smoothly month after month, invest a little time into configuration. Here’s what typically helps:

1) Separate tip lines in the POS. Ensure tips are clearly reported as a distinct total from sales. If the POS lumps them into a single “gross takings” number only, you’ll struggle.

2) Employee-level attribution. If you pay tips based on who served the customer, require staff to log in and assign checks. If you pool, you still need shift totals and hours.

3) Decide your payout method and keep it consistent. Cash daily payouts demand strict till discipline; payroll payouts demand strong reporting and payroll configuration.

4) Use a clearing account for card receipts. This is the single biggest quality-of-life improvement for reconciling deposits and fees.

5) Map integration accounts correctly. If your POS posts automatically to accounting software, ensure “tips” map to a liability account, not income.

Practical posting templates you can reuse

Here are a few reusable templates you can adapt. These are not tied to any specific software; they’re conceptual entries you can mirror through invoices, daily sales summaries, or journal entries.

Template 1: Daily POS summary (gross card receipts)

Debit: Card clearing — Total card receipts (sales + tips)

Credit: Sales revenue — Total sales

Credit: Tips payable — Total tips

Template 2: Processor settlement deposit

Debit: Bank — Net deposit

Debit: Merchant processing fees — Fees

Credit: Card clearing — Gross receipts settled

Template 3: Paying out tips (cash or bank)

Debit: Tips payable — Tips paid

Credit: Cash on hand or Bank — Tips paid

Template 4: Full refund including tip (not yet paid out)

Debit: Sales returns/refunds — Sales portion

Debit: Tips payable — Tip portion

Credit: Card clearing — Total reversed

Template 5: Refund tip already paid out (business absorbs)

Debit: Sales returns/refunds — Sales portion

Debit: Refunded tips expense — Tip portion

Credit: Card clearing — Total reversed

What to watch for at month-end

Month-end is where you catch problems early. A few quick checks can save hours later:

Tips payable balance sanity check. Ask yourself: does this balance equal tips collected but not yet paid? If you pay tips weekly and it’s month-end, it might reflect the last week’s tips. If you pay tips daily, it should be near zero (unless you’re behind).

Clearing account reconciliation. The card clearing/processor receivable account should reconcile to unsettled batches and timing differences. If it’s drifting upward or downward, you’re missing deposits, double-posting sales, or mis-recording fees/refunds.

POS totals vs ledger totals. Your sales revenue should match POS sales (net of refunds, if you’re posting refunds separately). Your tips payable increases should match POS tips.

Fees reasonableness. Compare merchant fees as a percentage of card sales. Big swings can indicate mis-posted deposits or a platform fee included somewhere else.

Special case: tip “on top” of an invoice vs tip included in the sale price

Some businesses add tips as a separate “line item” after the main sale, while others build it into the final price (for example, “pay what you want” models where the whole amount is discretionary). If the system doesn’t clearly split sale and tip, you may need to impose your own rule: define a base price as sales revenue and treat discretionary amounts as tips payable only if they are intended for staff and you will pay them out.

If the discretionary amount is retained by the business (for example, a donation-style checkout tip you keep to “support the business”), then it is not a tip for employees; it is income (potentially “Other income” if you want to separate it from sales). This is another reason why labeling matters. Your accounting should reflect what the amount is for.

Common mistakes and how to avoid them

Mistake 1: Recording tips as sales income. Fix by mapping tips to a liability account.

Mistake 2: Recording only net deposits and ignoring fees. Fix by recording gross receipts and fees separately so your books reconcile to statements.

Mistake 3: Paying tips but never clearing tips payable. Fix by posting tip payouts as a reduction of the liability, not as a wage expense or miscellaneous expense.

Mistake 4: Mixing cash payouts with no documentation. Fix by requiring end-of-shift reports and simple payout logs that match POS totals.

Mistake 5: Losing track of refunds and chargebacks. Fix by processing reversals through the same accounts you used for the original transactions and reconciling the clearing account monthly.

A simple decision guide you can apply immediately

If you want a quick, practical rule set, use this:

Rule 1: If the customer chooses the tip amount and it’s intended for staff, record it to Tips payable, not revenue.

Rule 2: Record card receipts at gross to a clearing/receivable account; record fees separately as an expense.

Rule 3: When you pay tips to staff—whether cash, payroll, or transfer—reduce Tips payable.

Rule 4: Reconcile monthly: POS tips collected minus tips paid should equal the tips payable balance.

Putting it all together with a fuller example

Imagine a small café with the following activity on a Monday:

Card sales (excluding tips): 1,200.00

Card tips added: 180.00

Total card receipts: 1,380.00

Processor fees for the day: 35.00

Net deposit on Wednesday: 1,345.00

Tips are paid to staff weekly via bank transfer on Friday.

On Monday, the café posts the daily POS summary:

Debit: Card clearing — 1,380.00

Credit: Sales revenue — 1,200.00

Credit: Tips payable — 180.00

On Wednesday, the deposit lands and the café records settlement:

Debit: Bank — 1,345.00

Debit: Merchant processing fees — 35.00

Credit: Card clearing — 1,380.00

On Friday, the café transfers 900.00 in tips for the whole week (including Monday’s 180.00 plus other days). The tips payout entry is:

Debit: Tips payable — 900.00

Credit: Bank — 900.00

At any point, the café can run a balance on Tips payable and know exactly how much in collected tips is still owed to staff. The sales revenue reflects only what the business earned from selling food and drinks. The processor fees are visible as a separate expense. And the bank statement can be reconciled because deposits match settlement entries.

Final checklist for recording card tips correctly

Use this checklist to keep your system tidy:

1) Confirm whether the amount is a discretionary tip or a service charge.

2) Set up a Tips payable (liability) account.

3) Ensure your POS/accounting mapping posts tips to that liability account.

4) Record card receipts gross into a clearing/receivable account.

5) Record merchant fees separately as an expense.

6) When paying tips, always clear the Tips payable account (do not record as sales or ignore).

7) Track refunds/chargebacks so you reverse tips appropriately.

8) Reconcile monthly: POS tips collected, tips paid out, and the Tips payable balance should agree.

Once these pieces are in place, recording income from tips added via card payments becomes less about guesswork and more about routine. You’ll have cleaner financial statements, smoother reconciliations, and a clearer view of what the business truly earns versus what it collects on behalf of the team.