How do tips work at restaurants? A guide for teens

Key Takeaways

• If you receive a tip as a restaurant worker, you won't keep it all because most restaurants use a system to split or "tip out" a share of the money with co-workers like bussers or food runners.

• Even if your boss pays a low hourly rate, your tips are legally required to bring your total earnings up to the standard minimum wage.

• All the tips you earn, including cash, count as income, which means you have to report them and start learning how to budget for inconsistent paychecks.

Getting your first job is a major life milestone, and it comes with a new set of money skills. You learn to manage your income, decide how much to save, and look for smart ways to spend. If that job is in the service industry, you also get to learn how tips work in restaurants.

Most restaurants handle tips using either a server-based or a pool system. You get tips from the tables you serve, or the staff shares the tip money that comes in. You may receive cash tips immediately, while credit card tips are typically paid later.

Don't worry — it's not as complicated as it sounds. Once you understand tipping for restaurants, you can help your friends figure out how much to tip for things.

How tipping works at a job

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People tend to associate tips with restaurants, but lots of service workers earn tips — hair stylists, Uber drivers, dog walkers, and even the barista at your favorite coffee shop. We tip all the time as consumers, but we don't always think about how tips work.

A tip is money that customers leave for the service workers who help them. It's supposed to be an "extra" payment, expressing gratitude for high-quality service — hence "gratuity," the other common term for a tip. 

Economically, tips serve as supplements to service workers' wages. As the service economy has evolved around tipping, tips have also become a social expectation.

How tips are calculated

Tipping norms differ based on the type of service. Navigating tip screens can be especially complicated, especially at cafés and fast-food places, where tipping hasn't always been the norm. Do you tip for takeout? It wasn't common before the COVID-19 pandemic, but since then, tipping 10% to 15% for pickup has become more standard.

Common tipping ranges by service type:

• Sit-down dining: 15% – 20% tip is considered the standard for full service.

• Takeout/pickup: 10% – 15% tip became more common post-COVID-19.

• Cafés/fast food: Tip is discretionary and often prompted by digital "tip screens."

Fortunately, sit-down restaurant tips in the USA have generally remained consistent. The norm is 15% to 20%, but the exact amount is your choice, unless the restaurant has automatically added a service charge, which can be common for large parties. Be sure to check if you go out with your whole soccer team or high school musical cast.

But customers aren't the only ones doing the math. Your server also has to figure out how their tip works — how you pay, who gets how much, and how to keep track. Servers can usually collect cash tips daily, but credit card tips have to go through processing. Servers may not get the money until their next payday, depending on local laws and restaurant policy.

How your tip is divided: Pooling vs. sharing

Key differences between tip pooling and tip sharing: 

• Tip Pooling: Everyone's tips are combined first, then split based on fixed percentages.

• Tip Sharing: You keep your own tips but "pay forward" a portion to your colleagues.

Restaurants often split tips among the people working that day. The official term for this practice is tip pooling, where the restaurant collects tips and redistributes them among those who worked that day. Support staff, such as bussers and food runners, are generally part of the tip pool. Kitchen staff usually aren't.

So, imagine you have a diner who tips $20 on a $100 bill. The restaurant's policy is for servers to get 40% of the evening's tips. Bartenders receive 30%, while bussers, food runners, and hosts each receive 10%. The server who took care of that table walks away with $8 out of that $20, while the bartender gets $6, and the support staff each get $2, plus tips from other tables.

Another option is tip sharing. In this case, each server keeps their own tips, but they give a certain tip percentage to support staff. For instance, the server who collected a $20 tip might keep 70% of that, or $14. They might give 10% each to bussers, food runners, and hosts, who would each get $2 for that table.

Tipped minimum wage: What teens should know

In many states, if you work a job where you regularly receive tips, your hourly "base pay" might look surprisingly low. Here is what teens should know about their tipped wages:

• Some employers use the 'tip credit' to pay a lower hourly wage: Because tipping is standard in the food service industry, the law allows restaurant owners to pay tipped employees a reduced minimum wage as low as $2.13 per hour. This is called a tip credit, and it's only available to restaurants that can prove that employees earn at least the federal minimum wage after tips.

• You are legally guaranteed to earn at least the federal minimum wage: If the employee's actual tips don't bring their pay to the federal minimum, currently $7.25 per hour, the employer must make up the difference. Employers also have to provide tipped employees with a breakdown of how tip credits work.

• Check your state’s rules on minimum wage and tipping: The laws on tipped minimum wage vary by state. Some have a higher direct wage than the federal minimum wage, while others pay the full minimum wage plus tips. If this applies in your state, your employer must follow the rule that pays you more.

How taxes work on tips

Workers are responsible for paying income tax on tips, including cash. It's your responsibility as an employee to keep track of your daily tips and tell your employer if they total $20 or more in a given month. 

Your employer will document your reported tips on your paycheck and withhold the money you owe for federal and state taxes. At the end of the year, you'll see your total earned tips on your Form W-2, which you'll use to file your taxes.

Teach money skills for life.

Tipping jobs are great first jobs for many reasons. 

• ​​Effort = Reward: They teach you that putting in the effort to do a great job has tangible results

• Budgeting Irregular Income: Tipping helps you practice managing and budgeting pay that isn't the same every week. This is an essential life skill.

From their first paycheck to saving for college, Greenlight helps families teach critical financial lessons. Check out Greenlight today, and start making the most of your hard-earned tips.

This blog post is provided "as is" and should not be relied upon as a substitute for professional advice. Some content in this post may have been created using artificial intelligence; however, every blog post is reviewed by at least two human editors.