Many of us don't think twice when we pay for dinner with a credit or debit card and add a couple dollars on the tip line. But what happens to that tip? How much of the tip does the waiter or waitress actually receive?
Waiters and waitresses are categorized as tipped employees. They make less than minimum wage because tips are supposed to more than make up the difference. In some states, waiters and waitresses earn half of the minimum wage. According to a 2008 study by the Bureau of Labor Statistics, the median hourly wage (including tips) for waiters and waitresses was $8.01.
Tipping policies vary by restaurant and not all restaurants give the total tip to the waiter or waitress. You may be surprised at how many employees receive a portion of your tip.
In some restaurants, servers place all of their tips into a tip pool which is distributed among qualifying workers, including employees who don't usually receive tips directly from customers.
Restaurants may also use a distribution formula that gives a percentage of the tip to the hostess, bartender and others involved in the dining experience.
At other restaurants, servers distribute tips to others based on net sales. For example, 1 percent of total net sales could go to the hostess, 1 percent to the bartender, 1 percent to the food runner, and 0.5 percent to the bus boy.
If the tip is left on a credit or debit card, the server gets the tip when cashing out at the end of the shift or the tip could be included in the paycheck. Tips on credit cards are reported as income and taxed. Cash tips should also be reported and taxed.
Fees paid to processors such as Visa, MasterCard, or American Express can also reduce the tip because some restaurants deduct the processing fee from tips charged to credit cards. This fee can be split between the restaurant and the server, or can cost up to 3 percent if the server has to pay the total fee. Deducting this fee from the tip may seem unfair to the server, but some restaurants view servers as an independent contractor and processing fees are part of their cost of business.
Tipping on a card can also affect the customer's bank account. If you use a debit card, banks can place a hold on a card for the expected tip, adding a 20 percent tip when the card is authorized. This is done before the tip is added by the customer and the money is frozen until the hold is removed. Removing the hold can take up to 72 hours. If a cardholder is low on funds, this could cause problems with an overdrawn account or declined payment.
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