You Ask, We Answer: Recording Tips and Gratuities in QuickBooks Online

For businesses where tips and gratuities are common—such as salons, spas, or other service industries—knowing how to record these amounts correctly is essential. Tips need to be accurately recorded to ensure employees are paid properly and taxes are managed. Here’s a simple guide on handling tips in QuickBooks Online (QBO), with options to make your process as smooth as possible.

How Tips Are Recorded on the Books

Tips that flow through your business need a clear and organized process in QBO. Here are two effective ways to record them:

Option 1: Using a Product Line for Tips

Instead of recording tips as income and making a journal entry, you can create a product line specifically for tips. This method allows you to assign tips directly to a “Tips Payable” liability account without needing a separate adjustment.

1. Create a Product Line for Tips: In QBO, go to Sales > Products and Services, and set up a new product named “Tips.”
2. Assign to Tips Payable: Link this product directly to your “Tips Payable” liability account, so any tip amount automatically appears as a liability you owe to employees.

This approach simplifies the process by skipping the extra journal entry, making it easy to track tips accurately from the start.

Option 2: Turning on Tips in QBO (Essentials & Plus Plans)

If you’re using QBO Essentials or Plus, there’s another convenient option: turning on tips directly within settings. This allows you to record tips directly on an invoice or sales receipt without creating a separate product line.

1. Enable Tips: Go to Settings > Sales > Sales form content and toggle on the option for tips.
2. Record Tips on Invoices or Receipts: Once enabled, a dedicated field for tips will appear on sales forms. This way, you can add tips directly to an invoice or sales receipt, and QBO will categorize it automatically.

Including Tips in Payroll

When paying employees, you’ll want to add their tip amounts to payroll to ensure taxes are calculated correctly.

1. Run Payroll: In the Payroll section of QBO, enter tips under each employee’s earnings. This step ensures proper tax deductions and makes sure tips are reported accurately.
2. Clearing Tips Payable: Once payroll is processed, your “Tips Payable” account should be cleared, reflecting that the tips have been paid out to employees.

Checking Your Tip History in QuickBooks Online

To review past tip transactions, go to Reports in QBO and run a “General Ledger” or “Journal” report. This gives you a clear picture of when tips were recorded, moved, and paid out, keeping everything documented.

Need Help with Tip Tracking?

If setting up these features sounds complex, a bookkeeper can assist with the initial setup and help maintain clean, accurate records—saving you time and ensuring everything is compliant. With this support, you can focus on providing excellent service while knowing your finances are in great shape! Ready to make that move? Click HERE!