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A Technology Solution to Salon/Spa Tipping Challenges

June 3, 2019 | By Neil Ducoff | 12 Comments

Tipping at salons and spas has been a quagmire of issues for, well, pretty much forever.

But in recent years, the migration from cash to plastic, and now electronic payments like ApplePay, means all of us are carrying less cash.

Last year, U.S. Bank did a study and found that 46% of people surveyed used cash less than eight days a month. Further proof that the need for cash is rapidly fading away.

Given that tipping in salons and spas is damn near a sacred practice, owners need a real solution.

More importantly, how your company addresses tipping is directly tied to your service providers’ future compensation, and a significant factor in employee retention. Simply put, it’s time to pay attention.

Let’s start with the three stages of salon/spa owner response to a customer asking, “Can I leave a tip on the credit card?”

Stage 1: DENIAL: No, I am not going to pay those added processing fees. Instead, I’m putting in an ATM and saying, “We don’t accept tips on credit cards.”

Result: Upset and inconvenienced customers, lower tips, and upset service providers.

Stage 2: UNDERSTANDING: I will allow tips on credit cards and reluctantly pay the processing fees. However, my service providers still want their tips daily, so I’ll “play bank” by sending someone to the bank each day to withdraw cash and payout tips every night.

Result: Additional payroll costs for that person who goes to the bank, divides up the cash and stuffs it into envelopes.

Stage 3: ACCEPTANCE: Yes, I’ll allow tips on cards, and will add tip income to their paychecks. They’ll just have to wait for payday to get their tips.

And then there’s the BIG issue of proper tip reporting and withholding tax.

FACT: According to the IRS, “Tips are income earned at work and taxable.” That’s the law.

  • You can’t make up a tip percent to report and think you’re compliant.
  • You can’t report only tips on credit cards and ignore cash tips.
  • You can’t say, “Tip reporting is my employee’s responsibility, not mine.”

FACT: If audited, IRS knows how to find unreported tip income and the owner will always be held accountable for failure to report and pay withholding tax — plus interest and penalties. Owners, tip reporting and withholding tax IS your responsibility.

When owners finally arrive at Stage 3, they believe they are done.  But they’re only half way there. Yes, you made it convenient for the customer. But are you optimizing the customer’s experience in a way that will result in higher tips? And are you optimizing your service provider’s experience? The answer to both is, “No.”

Tip amounts reflect the customer experience

Cornell University’s Center for Hospitality Research conducted several studies on tipping. They found waiters experienced a tip increase from 11.8% to 14.8% of the check total when they briefly touched the shoulder of the customer. Two of their studies showed that waiters that squatted next to the table when taking orders and talking with customers, increased their tips from 14.9% to 17.5% of the bill.

All of this can be achieved by the service provider, but the salon/spa drops the ball at the front desk.

Tippy is a new technology company that developed an easy-to-use tip processing system for salons and spas.

Tippy did a salon survey and found that over 50% of customers did not tip aggressively on credit cards, because they believed their stylist wouldn’t know what they tipped (versus the old days of handing the stylist cash).

The front desk tipping experience can make a big difference. The key is merging the convenience of credit card tipping with a personalized “direct-to-service provider” tip connection. Customers know their service providers will instantly see how much of a tip they gave them.

Here are the main obstacles the Tippy system overcomes:

  • Salon/spa is removed from the tipping process. Clients use the Tippy kiosk and their credit card to send a tip directly to their service provider.
  • Tippy completely eliminates the salon/spa from ALL credit card processing fees. Credit card processing fee is paid by the client. Processing fees can average $3,500 a year for a salon/spa doing $750,000 in revenue.
  • Instant gratification: Service providers are notified via the Tippy app on their mobile device every time a client leaves a tip, including the tip amount and will soon include the client’s name. Tips are deposited into the service provider’s bank account the next business day.

What Tippy doesn’t do:

Tips are income earned at work and the salon/spa is still responsible for reporting tip income and withholding taxes. The admin portion of the Tippy system provides tip reports for payroll processing.

Tippy means higher tips for your employees

Tippy created an algorithm for calculating tip options for clients that consistently increases tips an average of 30%. This is a direct benefit to your service providers. More importantly, it can be a factor in employee retention.

To tip their service provider, front desk guest care simply touches the service provider’s photo on the Tippy kiosk (a dedicated iPad mounted in a stand with a card swipe), enters the ticket total, and spins the Kiosk to face the client.

The client sees their service provider’s photo, selects one of four tip buttons, then swipes his or her credit card and it’s done. Service provider’s Tippy app instantly show the tip. That day’s tip money is in the service provider’s account the next day.

According to Tippy, the results vary based on the total ticket amount. (The lower the average ticket amount, the more a customer skews to the higher percentages and vice versa. Using an average service amount of $73.00, the approximate percentages are as follows:

  • Button 1 gives a 20% tip … used by 35% of clients
  • Button 2 gives a 25% tip … used by 23% of clients
  • Button 3 gives a 30% tip … used by 12% of clients
  • Button 4 is “Custom” … used by 30% of clients

Tippy says that with higher ticket amounts, customers tend to use the custom button to tip down slightly below 20%. For ticket amounts above $90, tips average 18.6%. Still, for service providers using Tippy, overall tips consistently average above 21%.

The bottom line on Tippy

  • IRS wants all tip income (by cash, check, credit card or chickens) reported and taxed. Tippy records and tracks all credit card tips. Because Tippy is so easy, convenient and fun for clients, it minimizes the need for clients to tip in cash. Salons and spas must become tip compliant.
  • Credit card processing fees on tips erodes profit. Tippy eliminates credit card processing fees.
  • Doing daily cash tip payouts is time consuming and an antiquated practice. More importantly, running to the bank to get cash for tip payouts leaves a paper trail. By the way, an ATM in your reception area also leaves a paper trail for IRS. With Tippy, service providers have today’s tips in their bank account the next day.

At Strategies, we view Tippy as a viable, modern and extremely affordable solution to processing tips.

So much so, we worked with Tippy to give you free shipping (saving you $50) of your Tippy kiosk (even if you return it). A 30-day free trial. And your first year free if you keep it (a $300 savings). Click here to claim your offer and get started with Tippy.

You can also meet Tippy at our 2019 Team-Based Pay Conference in Atlanta, GA, on September 29-30, 2019. 

Categories: Financial Literacy

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Comments

  1. Does the Guest need to swipe their card in two places for their services? Once for our POS (in our case Millennium) and then again at the Tippy Kiosk?

    1. Hi Jeanne!

      Yes. Tippy is currently a stand alone, plug-and-play system that is not integrated with your salon’s POS, so a second swipe is required.

      We have found clients are more than happy to swipe a second time knowing that their tip goes directly to their service professional’s “Piggy Bank”!

  2. Wow Papa Neil, thanks for your research. We wondered about that silliness and good to see the option explained clearly. The paper form 4070 we keep in house is not policed just saved in case of audit, but clearly providers are not accurate and ‘guess’ when turning the report in at the end of month.

    1. Hi Cala,
      You need to contact Tippy directly to see if they have local representation in your area. They are still relatively new and probably do not. But they can handle all your questions if you call them directly.
      Neil

  3. I’m actually shocked that strategies supports this. I’m having a hard time understanding why this is okay to charge the client for giving extra money to the stylist. I just don’t get it. I wouldn’t be happy with that at all as a customer. I went to a restaurant once and I was charged an extra dollar if i wanted to order my food to go, and I was outraged. This feels like the same.

    1. Hi Jessica,
      What Tippy is addressing is the challenge that many owners have with paying credit card processing fees on tips. Many salons have gone “We don’t accept tips on credit cards” … and there is a growing number of salons that have installed ATM machines. We view these approaches as a true inconvenience for clients. With less cash be carried these days, Tippy simply offers an option that allows tips on credit cards without the processing fees. And employees have their tip income deposited in their bank accounts the next day. It will be a solution for some but not all. The most important thing to remember is that clients need the convenience of paying tips on credit cards. Tippy isn’t perfect … but it is a solution that avoids ATMs and “No tips on CC” – both of which Strategies has never supported.
      Hope this clarifies.
      Neil

    1. Square is processing sales. Tips can be added … but you’ll pay processing fees on tips. Tippy eliminates processing fees for owners. Which can be substantial.
      All tip income earned at work is taxable. It is the salon’s responsibility to report all tip income.
      That’s pretty much it.
      Neil

  4. Tippy still doesn’t show cash tips, so it means we are still in charge of taxes for cash tips when we get audit?

    1. Hi Naoko,
      The key thing that Tippy does is eliminate the credit card fees on tips. This alone saves a salon your size thousands of dollars a year. Salons will always be responsible for cash tips. Employees need to report and withholding tax paid.
      Neil

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