Tips are the employees' money, and the point of sale is where most of them are first recorded. A setting chosen on opening day, such as an automatic charge on large parties labeled "gratuity", or a manager added to the tip pool, decides whether the restaurant is following federal wage law months later. We read the Department of Labor's Fact Sheet 15 and the two vendors' help articles on October 28, 2026. This is not legal advice; state law can be stricter, and Toast's own help says so.
For whom: an owner or general manager of a restaurant, bar or café setting up or auditing tips on the POS. Not for: questions about how tips are taxed on an employee's return.
Four federal rules your POS settings must respect
| Rule (DOL Fact Sheet 15) | What it means at the register |
|---|---|
| A compulsory charge for service, for example 15% of the bill, is not a tip | An automatic charge on the check belongs to the business unless you choose to pay it out, and then it is wages, not tips |
| Managers and supervisors may not keep employees' tips or receive tips from a pool; they may keep only tips customers give them for service they directly and solely provide | Turn tip eligibility off for anyone who meets the DOL's manager test: primary duty managing the business or a department, directing the work of at least two full-time employees or the equivalent in part-time hours, and authority to hire or fire or recommendations on hiring and firing given particular weight; owners with at least a 20% equity stake who actively manage are also excluded |
| The employer may not keep any part of employees' tips | Every tip collected on a card must reach the employees |
| A credit card fee can be deducted from tips only up to the card company's transaction fee, and never so far that the employee's wage falls below the required minimum wage | With a 3% fee, a $20 card tip can be reduced by $0.60 at most |
If you take the tip credit, the cash wage can be as low as $2.13 an hour federally, with a maximum credit of $5.12 against the $7.25 minimum wage, and tip pools may include only employees who customarily receive tips. Many states set higher minimums or ban the tip credit, so check yours.
How each POS separates the money
| Toast | Square | |
|---|---|---|
| Service charge vs gratuity | One setting decides: "Assign to check owner (Gratuity?)". Yes makes it a mandatory gratuity paid to the check owner as non-tip income; No makes it an employer-kept service charge in net sales | Not documented in the tip-pooling article we read |
| Tip pools | Mandatory gratuities can be chosen as a pool source in Toast's tip-pooling policy | Pools by transaction, day or week; split equally, by percentage, by hours worked or per recipient |
| Keeping managers out | Not covered in the service-charge article we read | "Tip eligible" toggle on each team member's profile |
| Plan | Not stated in the article we read | Square Plus ($49 per location a month) or Premium, and some Premium editions |
Our pick
Toast, for a full-service restaurant. The riskiest setting is whether an automatic charge is a tip, and Toast puts that decision in one explicit setting with a payroll consequence attached: a mandatory gratuity goes to the server as non-tip income, an employer-kept service charge stays in sales. That makes the federal distinction visible to whoever sets up the menu, not just to the accountant.
- Choose Square for a café or counter-service shop that pools card tips among baristas: tip pooling arrives on Square Plus, managers are excluded with one toggle, and it can split a pool by hours worked as well as equally or by percentage.
- On any POS, print the service charge on the receipt with a name that does not say "tip" or "gratuity" if the business keeps it.
Audit your setup in ten minutes
- Open the list of service charges and check each one: kept by the business, or paid to staff?
- Open the tip pool and remove anyone who meets the manager test above.
- Check the card-fee setting: deduct nothing, or only the actual processing percentage.
- Run last week's tip report and reconcile it: card and cash tips collected, minus any card-fee deduction at cost, must equal what employees were paid.
For what a restaurant POS costs before tips enter the picture, see POS system cost; for adding a surcharge instead of raising prices, see credit card surcharge rules by state.
Traceable evidence
Sources for this decision
- officialDOL Fact Sheet 15: Tipped Employees Under the FLSAU.S. Department of Labor, Wage and Hour Division · checked Oct 28, 2026 · supports: DOL Fact Sheet 15 as read on October 28, 2026: a compulsory service charge, for example 15 percent of the bill, is not a tip; managers and supervisors, defined by a duties test (primary duty managing the enterprise or a department, customarily directing the work of at least two full-time employees or their equivalent, and authority to hire or fire or recommendations given particular weight) or as owners with at least a 20 percent equity interest who actively manage, may not keep employees' tips or receive pooled tips but may keep tips received directly for service they directly and solely provide; an employer may not keep employees' tips for any purpose; when tips are charged on a credit card, the employer may not reduce them by more than the card company's transactional fee, and that fee may not reduce the employee's wage below the required minimum wage; the minimum cash wage for a tipped employee is $2.13 an hour with a maximum tip credit of $5.12 against the $7.25 minimum wage, and an employer taking a tip credit may pool tips only among employees who customarily receive tips. It does not state state law, which may be stricter.Open source ↗
- vendorToast support: Get Started With Service Charges and Mandatory GratuityToast · checked Oct 28, 2026 · supports: Toast's help article as read on October 28, 2026: the setting Assign to check owner (Gratuity?) set to Yes makes a charge a mandatory gratuity paid to the check owner as non-tip income, set to No makes it an employer-kept service charge counted in net sales that does not appear in Toast Payroll; mandatory gratuities can be selected as a source in a tip-pooling policy; state law may differ from the federal treatment. It does not prove a restaurant's legal compliance.Open source ↗
- vendorSquare help: Set up tip poolingSquare · checked Oct 28, 2026 · supports: Square's help article as read on October 28, 2026: tip pools are created under Staff, Settings, Tips, tallied per transaction, daily or weekly and split equally, by percentage, by hours worked or per recipient; a Tip eligible toggle on each team member's profile excludes managers; the feature is available to Square Plus and Premium subscribers and some Premium editions. It does not address card-fee deductions from tips or service charges.Open source ↗
- vendorToast official product siteToast · checked Aug 5, 2026 · supports: Vendor-published product scope used to verify capabilities relevant to this buyer context: Restaurants evaluating a restaurant-centered POS and operating stack. It does not prove the guide's fit verdict, configured performance, current pricing or compliance.Open source ↗
- vendorSquare official product siteSquare · checked Aug 5, 2026 · supports: Vendor-published product scope used to verify capabilities relevant to this buyer context: Small merchants evaluating an integrated POS, payment, hardware, and business-software ecosystem. It does not prove the guide's fit verdict, configured performance, current pricing or compliance.Open source ↗
- vendorSquare pricing pageSquare · checked Oct 27, 2026 · supports: Square's own pricing page as read on 2026-10-27, supporting the entry list price of its Square Free plan ($0/month software; 2.6% + 15¢ in person) and the page details recorded with it (Plus $49 and Premium $149 per location/month), and a free plan (Yes, Square Free). It does not prove the total cost for a given buyer, later price changes, promotions, negotiated discounts or taxes.Open source ↗