Restaurant payroll and tips

Controlled tips and direct tips are treated differently

This is the distinction that decides your obligations, and it turns on who controls the money.

A direct tip goes from the customer to the employee without the employer deciding anything about it. Cash left on a table and kept by the server is the clearest case. Direct tips are taxable income to the employee, but they are generally not pensionable or insurable, so CPP and EI are not withheld on them by the employer.

A controlled tip is one the employer handles. If you pool tips and distribute them, add a mandatory service charge, or decide how gratuities are allocated between staff, that money has passed through your control. Controlled tips are generally treated as pensionable and insurable earnings, which means CPP and EI apply and the amounts belong in the employee’s income through payroll.

The practical consequence is that a house tip pool, which most restaurants run for good operational reasons, usually converts tips into controlled tips. Restaurants that pool but treat the result as direct tips are under-remitting, and they usually do not find out until CRA reviews the payroll.

Turnover means Records of Employment

Hospitality has the highest staff turnover of any sector taxifi serves, which means an interruption of earnings happens somewhere in the business most months. Each one requires a Record of Employment filed with Service Canada, not CRA, within a short window.

Electronic ROEs are due five calendar days after the end of the pay period in which the interruption occurred. Miss them and former staff cannot claim Employment Insurance, which turns into a phone call to you. Our Record of Employment guide covers the deadlines and the Block 16 reason codes, including why coding a layoff as a quit causes problems for everyone.

Variable hours and provincial standards

Restaurant payroll is rarely a fixed salary run. Hours vary by week, staff work across positions at different rates, and public holidays bring premium pay rules set provincially rather than federally. Vacation pay accrues on wages including, in most provinces, on certain tip treatments.

Those are employment standards calculations rather than tax ones, and they are the part most generic payroll software handles poorly for this industry.

Remittances, on a tight cash cycle

Source deductions are due by the fifteenth of the month after you pay your team for most small employers, and CRA charges a graduated penalty that rises the longer a remittance is late. Restaurants are particularly exposed here, because a slow month can tempt an operator into treating withheld deductions as working capital. Those amounts are held in trust and directors can be personally liable for them.

Our guide on payroll remittances sets out the mechanics, and the late remittance penalty guide sets out what being late costs.

Also: Restaurants in Ontario · Restaurants in Toronto · Restaurants & hospitality. More for this industry: Restaurant accounting · Restaurant bookkeeping · Restaurant payroll

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