The process depends on whether tips come through credit cards or cash, because each flows through your books differently.

Credit card tips are the easier side. When a customer tips on a card, the amount shows up in your merchant deposit alongside the service charge. Your POS system should separate tips from service revenue so you can see exactly how much each stylist earned in tips during a pay period. Those amounts get added to the stylist’s gross wages on their paycheck, and you withhold federal income tax, Social Security, and Medicare just like you would on regular pay. There’s no extra reporting step for the employee because the transaction is already recorded electronically.

Cash tips take more effort because nothing flows through a system automatically. The IRS requires any employee who receives more than $20 in tips during a calendar month to report those tips to their employer. Stylists need to submit a written tip report by the 10th of the following month. You can use IRS Form 4070 or create your own internal log. The report should include the employee’s name, the reporting period, and total cash tips received. Many salons and spas make this part of the daily closing routine, having stylists record cash tips at the end of each shift so the numbers are fresh and accurate.

Once you have both credit card and cash tip amounts, you include them in the employee’s gross pay for that payroll period. You withhold federal and state income tax plus FICA (Social Security and Medicare) from the stylist’s paycheck to cover the tax on wages and tips combined. You also owe the employer’s share of FICA on reported tips, which is an additional cost beyond what you pay in wages. If a stylist’s regular wages aren’t enough to cover all the withholding, you withhold what you can and the employee handles the rest when they file their personal tax return.

New York State treats tips the same as wages for state income tax withholding. Tips also factor into the minimum wage calculation under New York’s tip credit rules, so keeping clean records protects you on both the tax and labor law side.

At year end, all reported tips show up on the W-2 as part of Box 1 wages. If you’re a larger salon and your employees’ reported tips fall below 8% of your gross receipts, you may need to allocate additional tip amounts on the W-2 in Box 8. This doesn’t change the tax you owe but it’s a reporting requirement that catches some owners off guard.

The biggest mistake salon owners make is not having a consistent system for collecting cash tip reports. Without those reports, you can’t withhold correctly, your payroll records are incomplete, and your W-2s won’t reflect reality. Set up a simple daily tip sheet, make it part of how the shop runs, and stay on top of it every pay period. If payroll and tip tracking feel like too much to manage alongside running the business, working with Bronx bookkeepers who understand tipped payroll can take that weight off your plate and keep you compliant.