How to Record and Reconcile Payroll Tips in QuickBooks Online

If your business collects and distributes tips, keeping accurate records in QuickBooks Online (QBO) is essential for proper bookkeeping, payroll compliance, and tax reporting.

In this post, we’ll cover:

• How to properly record tips received and paid out

• How to reconcile tips with payroll

• Common mistakes to avoid

Understanding Payroll Tips

There are two main types of tips in a business:

1. Employee-reported tips – Tips received directly from customers and reported by employees (e.g., cash tips).

2. Employer-distributed tips – Tips collected by the business (e.g., credit card tips) and paid out to employees through payroll.

For proper tracking, these must be recorded separately from regular wages in QBO.

Step 1: Setting Up Accounts for Tip Tracking

Before recording tips, ensure you have the following accounts in your Chart of Accounts:

• Tips Received (Liability Account) – Tracks tips collected but not yet paid to employees.

• Tips Paid (Expense Account) – Records tips paid out to employees through payroll.

You can check or create these in:

➤ Settings → Chart of Accounts → New

Step 2: Recording Tips Collected from Customers

If customers leave tips via credit card or other electronic payment methods, these need to be recorded properly before payroll processing.

💡 How to Record Tips Collected in QBO:

1. When recording a sales transaction (invoice, sales receipt, or deposit), enter the tip amount as a separate line item categorized to the Tips Received liability account.

2. When funds are deposited to your bank account, ensure the tip portion is correctly mapped to the liability account.

This keeps tips separate from business revenue and ensures they are properly distributed to employees.

Step 3: Paying Out Tips in Payroll

When running payroll in QuickBooks Online Payroll, make sure tips are added to each employee’s paycheck.

📌 To Add Tips to Payroll:

1. Go to Payroll → Run Payroll

2. Select the employee

3. Under Additional Earnings, enter the tip amount

4. Confirm deductions and tax withholdings

5. Run payroll as usual

💡 Tip: QBO Payroll automatically includes tips in W-2 wages and calculates applicable payroll taxes.

Step 4: Reconciling Payroll Tips

After paying out tips via payroll, you need to zero out the Tips Received liability account.

📌 To Record Tip Payments in QBO:

1. Create a Journal Entry

2. Debit the Tips Received liability account

3. Credit the Tips Paid expense account

4. Match the journal entry with payroll transactions in QBO.

💡 Tip: Run the Payroll Summary Report to ensure all reported tips match payroll distributions.

Common Mistakes to Avoid

• Recording tips as income – Tips are not business revenue and should be categorized separately.

• Forgetting payroll tax calculations – Tips paid through payroll are subject to FICA, Medicare, and other payroll taxes.

• Not reconciling tips with payroll – The Tips Received liability account should always reconcile to zero after payroll.

How We Can Help

Managing payroll tips in QBO can be tricky, especially when reconciling tip payouts with payroll. We help businesses keep their books accurate and maintain compliance with payroll tax requirements.

📩 Need help with QuickBooks Online cleanup or payroll bookkeeping? Contact us today!