Here's What Happens When You Tip With a Credit Card

While I’m not a big fan of tipping culture in general, I have to acknowledge the reality around me, so I always try to tip fairly when I’m out. But one conversation I’ve had with a few folks over the years isn’t so much about how much to tip as to what method to give that tip.

Specifically, is it better to tip with your credit card as part of your bill, or should you use cash to tip?

I’ll be honest, I’m a little torn on this one. As a rewards maximalist, I want to use my rewards credit cards for everything. But as a service industry veteran, I know that cash is still king. So I tend to give folks both sides of the equation and let them make their own decision.

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And that’s what we’re doing here. Let’s take a look at what happens when you tip with a credit card.

The tip gets paid out as part of the paycheck

When you tip in cash, that cash typically goes home with the staff that same day. However, when you tip on your credit card, that transaction has to get processed through all the banks the same way any credit card transaction does.

As a result, this generally means that tips from credit and debit cards get paid out on payday as a line item on the paycheck. So, if the employees get paychecks every two weeks, it could be that long before they see your tip in their bank account.

The tip gets reported as income to the IRS

Another side effect of the tip being part of the paycheck is that it gets reported to the IRS as income. In other words, the tipped income becomes part of the worker’s W-2.

Some folks who are frequently paid in cash may not report all of those cash tips as part of their income at tax time. This can reduce their taxable income and save them some money on taxes.

Considering that many service industry employees are already struggling financially — folks in the service industry are more likely to be considered “working poor” than people in other major industries — I can see both sides of the argument for and against this type of behavior. I leave you to make your own judgments here.

The tip bills as part of the dining charge

So far, we’ve talked about the differences for the workers. Well, there’s a difference for you as the tipper, too. Essentially, if you tip in cash, you don’t earn any purchase rewards on the tip. But when you tip on your credit card, the tip gets bundled in with the bill, so it will earn the same rewards as your food did.

If you have a dining rewards card, this means you’ll earn the same bonus rewards for the tip as the meal. In the case of particularly expensive meals — and, thus, particularly large tips (I hope) — this can really add up to a lot of extra cash back or points.

Any tip in a storm

At the end of the day, as long as you’re tipping appropriately for the level of service, it doesn’t really matter what payment method you use. Most of us are simply happy when we can pay our bills.

That said, if you don’t mind missing out on a few rewards points and happen to have cash at hand…well, your serving staff would probably appreciate that just a little bit more.

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