When a client adds a $10 tip to a card payment, the whole amount — service plus tip — goes through the card processor, and you pay the processing fee on all of it. The tip isn't your money. The fee on it is your cost.
It's easy to miss because it never appears as a line of its own. It's folded into the effective rate on your statement. But it adds up.
What it costs
Take a salon doing $40,000 a month in card sales, with tips averaging 18% on top. That's $7,200 a month in card tips. At an effective processing rate of 3%, the fee on the tips alone is about $216 a month — roughly $2,600 a year — paid by the business on money that goes straight to staff.
A restaurant with higher tip volume pays proportionally more. For a busy dining room it can be one of the larger costs nobody has ever looked at directly.
If you don't know your effective rate, it's last month's total card fees divided by total card volume. What a free salon POS actually costs walks through it.
Can you pass it on?
Sometimes — and the rules are specific enough that it's worth checking before you do anything.
Under US federal rules, an employer can generally reduce a card tip by the share of the processing fee that applies to it, so a $10 tip charged at 3% can be paid out as $9.70. Some states don't allow it; California is the best-known example, where card tips have to be paid in full. Local rules can add their own requirements, and how quickly tips must be paid out is regulated too.
So check your state's rules, or ask your payroll provider, before changing anything. If you can pass the fee on, there's a second question: whether you should. Taking 30 cents off every tip is legal in many places and noticed by staff in all of them. Plenty of owners decide the goodwill is worth $2,600 a year and absorb it. What matters is that it's a decision, not a cost you never knew you were paying.
The split-payment trap
Here's where tips genuinely go wrong, and it's a software problem rather than a policy one.
A group pays one bill on two cards, and one of them adds a tip. Which payment is the tip recorded against?
If the system attaches it to whichever card was run first rather than the one the guest actually tipped on, your records now say the wrong person tipped. That sounds harmless until a guest disputes a charge and the amounts don't match what they signed — or until tips are paid out from the card records and one ends up credited to the wrong person's shift.
Test it: run a two-card split payment, add a tip only on the second card, and check which payment it's filed against. It takes two minutes, and it tells you whether your system thinks of a tip as belonging to a person or just to a check.
Cash tips and the drawer
Cash tips avoid the fee entirely, and some clients tip in cash precisely because they know that. But they bring their own problem: they still have to be recorded for payroll and tax, and "the technician kept it" isn't a record.
A tip jar shared out at the end of the week and a cash tip handed to one person are treated differently, and both need logging. A system that records cash tips on the ticket, alongside card tips, saves a very tedious Sunday.
What to do this month
- Work out the number. Last month's card tips times your effective rate. Now you know what it costs.
- Check your state's rules before deciding whether to pass any of it on.
- Run the split-payment test on your POS.
- Decide, and tell your staff. Whatever you choose, people accept a policy they were told about far more readily than a deduction they discovered.
The register side of this is the Sonorch POS — worth running that two-card test on whichever system you're considering.