In the wake of recent changes in the market, more and more service industry small business owners are considering whether or not a tipping system is appropriate for their companies. Here are three factors entrepreneurs should consider before making a change to how their employees are compensated.

Without tips, your payroll costs will go up

If you choose to move away from the tipping system, you will face an increased payroll cost. The reason being, the federal minimum wage for tipped employees is $2.13, while the federal minimum wage for non-tipped employees is $7.25. By limiting tips, you will be responsible for bridging the gap between those two amounts. As such, you should look over at least a year’s worth of merchant receipts to find out exactly how much your tipped employees are making on average and how that amount compares to both the federal and state minimum wage.

Service charge versus tips

While customers may perceive service charges and tips as being the same, they are legally distinct. For example, when booking a table for a party greater than six, many restaurants will automatically tack on a service charge of 18 percent. As this Find Law post explains, the Internal Revenue Service considers a mandatory service charge to be different from a tip, and the responsibility of reporting those earnings falls to the employer not the employee. So, a restaurateur could eliminate the tipping system, but still offer their staff competitive wages using service charge revenue.

$15 an hour minimum wage is slowly becoming a reality

In recent years, there has been a countrywide push to raise the minimum wage in order to meet the rising cost of living. A number of cities in California, Washington and New York will be making $15 an hour their minimum wage, and voters in six states and nine cities will be faced with the $15 an hour ballot initiatives in late 2016. As this trend shows no signs of slowing down, conscientious small business owners should figure out if their operations will still be profitable with a $15 an hour plus payroll crossed increase within the next five years. If the answer is no, maintaining a tipping system might be the best course of action.



This article was written by Mario McKellop for Small Business Pulse


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