A credit card tip (or "charged tip") is a tip added by the customer on a credit/debit card transaction or through a payment app (Apple Pay, Square, etc.). Because the transaction flows through the establishment's POS, the employer has automatic visibility into the amount, and you don't need to separately report it.
Two distribution models:
- Same-day cash payout: the restaurant gives you cash equal to your credit card tips at the end of each shift. Still reported as tip income, but the cash is in hand immediately. Some states require this; others don't.
- Paycheck payout: credit card tips appear in your paycheck along with wages. Taxes are withheld directly from the combined paycheck.
Federal law allows employers to deduct the credit card processing fee from your credit card tip — but only the proportional share attributable to that tip. A 3% processing fee on a $20 tip = $0.60 the employer can keep; the worker gets $19.40. Some states (California, others) prohibit this deduction entirely.
From a tax angle, credit card tips are identical to cash tips: ordinary taxable income subject to federal income tax, FICA, and state tax.