A woman serving two customers cups of coffee.

How does tipping with a credit card work?

Saturday, December 05, 2015

Tipping, also known as gratuity, is a longstanding tradition practiced across the globe. It involves providing an additional payment to a staff member (or group of staff members) on top of the standard cost of service. The amount given out is determined by the customer, and is often impacted by the quality of service or the customer’s beliefs towards tipping.

While tipping is simple in theory, it can be complicated by variations in cultures and different forms of payment. Specifically in the United States, whether a customer tips through cash or through a debit/credit card can affect all members of the transaction: the merchant, the customer, and the staff member receiving the gratuity.

Because some customers may not know how to tip on a credit card and some merchants may be curious how different forms of tipping affect their business, this article will focus on how credit card tips differ from cash tips, how they’re processed, and what customers and merchants should expect.

How does tipping on a credit card work?

It’s a common misconception that tipping creates two separate charges on your card, one for the cost of service and the other to cover the tip. This belief may stem from the fact that many businesses first run your card, print out a receipt, then have you fill out a tip, which may lead some to believe that the tip is a separate payment applied later.

But because of how credit cards work, the amounts are simply combined together to make for one final amount that is processed and then applied to your card; all typically within 2 business days.

Taking a dine-in restaurant as an example, the process looks like this:

  • Once you’ve finished your meal and your party is ready to leave, ask the wait staff for your bill. Inspect it to make sure the charges are accurate and then place your card with the bill and the wait staff will come back and pick it up and run your card.
  • Wait staff will then return your card and provide you with two copies of the receipt, a “merchant copy” and a “customer copy”. On the merchant copy, inspect the pre-tax total and use this amount to determine your tip amount: in the United States, 15% is seen as the standard, with 16-20% denoting good service, and 20+% denoting above excellent service.
  • Whatever percentage you choose to tip, write this amount on the “tip” line on the merchant copy.
  • Then, add your tip amount to the total amount you were charged for service and write this new amount on the “total” line.
  • Duplicate this information onto your customer copy and keep it for your records to make sure the final amount that gets applied to your card matches. (also, don’t forget to grab your card! it’s surprisingly common for cardholders to accidentally leave their card with the vendor)

Paying for the service through a card but then tipping in cash: In the event you wish to cover the service fee with your credit or debit card but want to tip with cash, simply write “cash tip” or “0” or simply mark a dash on the tip line, write out the total (which will simply be the total amount you were charged for service, and then leave the cash tip securely with the bill.

This is not advised, but in the event you choose not to tip, it’s always best to write 0 or a dash on the “tip” line to avoid that line being filled out for you and save yourself and the merchant from having to work through a transaction dispute. Situations like these are why it’s a good idea to keep credit card receipts to compare the amount you’re charged with the amount you wrote down.

Paying for the service in cash but then tipping through a card: This option is a bit more rare, but it does happen. In the event a customer pays the service fee in cash but then wishes to pay the tip through a card, most businesses will then just charge $0.01 to the card and then have the customer write out the tip amount on the receipt for that charge and then pay it out to the worker.

Advantages of card tips

Perhaps the most apparent benefit of being able to tip with a card is having access to your bank account from which to make larger tip amounts with. Some may not feel comfortable carrying in cash the amounts in which they may predict themselves tipping, making tipping through a card desirable.

When tipping with cash, there’s no receipt to keep for your records. Likewise, merchants also have no documentation of your tip and have to rely on the goodwill of their staff to accurately report their cash tips for tax purposes or to contribute to the tip pool if the restaurant pools tips.

Card tips however are easily documented for both the customer and vendor, providing credit card statements for both members that they can use for budgeting reasonings, record keeping, disputes, and data analysis. Many merchants use these tip amounts to create tip averages for each member of their staff and then hold contests and award prizes to workers who increase their average.

Advantages of cash tips

Cash tips are speedy and make for a streamlined checkout experience, not just for customers, but wait staff and merchants as well. Rather than going back and forth with wait staff and passing around both the bill and your card, you can simply provide the cash sum covering the service and gratuity, get your receipt (and change if applicable), and head out. Many customers choose to simply leave the cash on the table and leave without a receipt (which we don’t advise), but this does let customers leave quicker and allow staff to seat new customers faster.

With cash tips, staff members will receive their tip immediately, whereas with card tips some merchants are unable to provide them with their tips until after the payment has been fully processed. Cash tips also avoid any credit card processing fees that may affect the total tip amount staff members receive in the end.

How long will it take until credit card tips go through?

Like any other credit card purchase, tip transactions are not applied immediately. The majority of them will finish processing in just one business day, but some can take up to 2-3 business days to complete.

It’s a traditional practice for merchants to go through tip receipts at the end of the night and double-check to ensure that the proper tip amounts were applied. This greatly helps to reduce the number of payment disputes made by customers and is a practice that every business should implement if they accept tips.

In the event of a tip amount being misapplied, then the credit card transaction will be canceled and the corrected amount will be sent out, thus prolonging the time it will take for the credit card tip to go through.

Closing thoughts

As a staff member who can receive tips (be it a food server, transportational worker, hotel service, etc), it’s always a pleasure when customers are deliberate in making sure you receive the most of your tip. This could mean being asked if you have a preference between cash or credit card tips and whether or not your restaurant pools their tips. Every business is different, so a few questions to an individual who knows how the company works can go a long way in determining which payment system is best to tip with.

As a customer, the payment option you choose to tip with isn’t the biggest deal in the world, and it really comes down to personal preference. Deciding factors will often include how much cash you’re carrying, any credit card reward programs you’ve signed up for, and whether you’re in any bit of a rush.

Finally, as a merchant, both payment options can be easily integrated into your system with help from your payment processor. While credit card tips might seem the obvious preferred choice due to easy record keeping, it’s completely feasible for businesses to instill procedures that allow for cash tips to be accurately documented. Furthermore, while cash tips may seem desirable to allow for staff members to receive their tips quickly, businesses can work together with their payment processor to streamline their payroll system, ensuring workers receive their credit card tips in a timely manner.

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