How Businesses Can Avoid Credit Card Processing Fees on Tips

When a customer leaves a tip using a credit card, that tip is subject to the same card processing cost as any other credit card transaction. For credit card processing companies, it doesn’t matter whether the customer is paying for a service, product, tax, or tip: if they’re using a credit card, the cost to process that transaction is the same.

The Impact on Businesses

Let’s review a few common scenarios to understand how credit card processing fees impact businesses’ bottom line — particularly in relation to tips. For these scenarios, let’s say you own a European axe-throwing business, and your service provider collects the following fees:

• 5% service fee on regular (non-tipping) credit card transactions. This fee covers both the service provider’s costs, as well as the card processing fee they must pay to the credit card company.
• 2.9% + €0.30 card processing fee for tip transactions. This fee covers the card processing fee only and is a one-to-one match with the fee collected by the credit card company.

Scenario 1: Tips made via credit card

A customer selects a €100 axe-throwing experience. At checkout, they are presented with €105 as their total amount due (€100 subtotal + 5% service fee). They then decide to leave a €25 tip on the same transaction. Because the tip is left via credit card, it is subject to the card processing fee (2.9% of €25 + €0.30 = €1.02).

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In the end:

• The customer pays €130.00 (€105 subtotal + €25 tip)
• €4.55 goes to the service provider (They collect the €5 service fee, €0.45 of which they pass along to the credit card company)
• €1.47 goes to the credit card company to cover processing (€0.45 from the subtotal; €1.02 from the tip)
• €25 goes to the worker(s) for which the tip was intended

• Your business collects the remaining €98.98

Scenario 2: Cash tips

A customer selects a €100 axe-throwing experience. At checkout, they are presented with €105 as their total amount due (€100 subtotal + 5% service fee). After completing their experience, they leave a €25 cash tip.

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In the end:

• The customer pays €130.00 (€105 subtotal + €25 tip)

• €4.55 goes to the service provider (They collect the €5 service fee, €0.45 of which they pass along to the credit card company)
• €0.45 goes to the credit card company to cover processing
• €25 goes to the worker(s) for which the tip was intended
• Your business collects €100.00 (the original cost of the experience)

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As you can see, encouraging your customers to tip in cash is a great way to minimize the impact of credit card processing fees. Find more tips, tricks, and valuable information in the FAQ section below.

Frequently Asked Questions

Are credit card processing fees standard on tips?

It is standard practice for credit card companies to charge a processing fee for any and all charges, including purchases made toward products, services, taxes, and tips.

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It is standard practice for service providers (such as Stripe, Square, and Venmo) to deduct the card processing fee amount from credit card transactions, and to pass that amount along to the credit card companies in order to cover said processing fee.

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Depending on your country, region, and industry, it may be possible for business owners to deduct the card processing fee amount from the workers for which the tips are intended. If you are interested in pursuing this option, it is vital that you take the time to understand the legal obligations of your region before implementing any changes to your company’s tipping model.

How can my business avoid credit card processing fees on tips?

You don’t want the credit card companies touching your tip pool. Who does?! Fortunately, there are a few options to reduce this dip into your team’s earnings:

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Accept cash tips.

The credit card companies can’t touch these!

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Compare payment processing services.

There are a number of payment processing services to choose from, such as Venmo, Square, and Stripe.

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At TripWorks, we use Stripe — and it’s a no-brainer. Consider the current processing fees for each of these services:

• Stripe: 2.9% + $0.30
• Venmo: 3%
• Square: 3.5% + $0.15

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Deduct the card processing cost from the tips themselves.

Consider this option if and only if you live in a region where it is legal to deduct the card processing fee from your employees’ tips. (Again, it is advisable to seek legal counsel before implementing changes, so as to ensure compliance with local wage laws.)

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