In industries like hospitality, food service, and personal care, tips and gratuities are a meaningful part of an employee's earnings. Handling them correctly on payroll isn't just good practice, it's a requirement from the Canada Revenue Agency (CRA), and the rules differ depending on whether the tips are considered direct or controlled.
This article explains the difference between direct and controlled tips per the CRA, how each type is taxed, and how to add tips to a payroll run in Wagepoint.
Understanding direct vs. controlled tips
Wagepoint has two different types of default tip income types: Controlled and Direct. The CRA treats each type differently, which affects how the tip is taxed and whether it is paid out through payroll.
At a glance:
Controlled tips are tips collected and allocated by the employer and paid out with the employee's pay. These tips are recorded and taxed as employee income.
Direct tips are tips paid directly to the employee by the customer with no intervention from the employer. We report them on the paystub, but do not pay them out or tax them.
| Controlled tips | Direct tips | |
|---|---|---|
| Paid out with the employee's pay | ||
| Income tax applied | ||
| EI applied | ||
| CPP applied |
Click each option below for a full breakdown of that tip type.
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Controlled tips are tips collected and allocated by the employer and paid out with the employee's pay. Because the employer is involved in the flow of the money, the CRA considers controlled tips to be part of the employee's regular earnings.
Common examples of controlled tips include:
- Mandatory service charges or gratuities added to a customer's bill by the employer.
- Tips that are pooled, shared, or redistributed according to a formula set by the employer.
- Tips included on credit or debit card payments that the employer processes and later pays out to the employee.
- Tips the employer collects and holds before distributing to staff.
How Wagepoint handles controlled tips
Controlled tips are considered employment income and are fully subject to source deductions. When you add controlled tips to a Wagepoint payroll run:
- Income tax is withheld on the tip amount.
- Canada Pension Plan (CPP) contributions are calculated on the tip amount, with matching employer contributions.
- Employment Insurance (EI) premiums are calculated on the tip amount, with matching employer premiums.
Controlled tips are included in the employee's insurable and pensionable earnings, and are reported in Box 14 (Employment income) on the T4.
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Direct tips are tips paid directly to the employee by the customer with no intervention from the employer. Wagepoint records direct tips on the employee's pay stub for reference only and does not pay them out. This makes it easier for your employee to report their direct tips when doing their income tax each year.
Common examples of direct tips include:
- Cash a customer leaves on the table for a server.
- A tip a customer hands directly to a bartender, stylist, or delivery driver.
- Tips from a tip-sharing arrangement organized by employees themselves, with no employer involvement.
- A tip added to a credit or debit card payment that the employer immediately passes through to the employee without retaining control.
How Wagepoint handles direct tips
While direct tips do get reported on the employee pay stub, Wagepoint does not calculate any taxes on them or report them to any tax forms, such as a T4:
- Income tax is not withheld on the tip amount.
- CPP contributions are not deducted.
- EI premiums are not deducted.
Important: Direct tips are not paid out to the employee through payroll. The assumption is that the employee has already received the tip directly from the customer. You still enter the direct tip amount in Wagepoint, but the dollar value is not added to the employee's net pay or deposited to them.
Note: If you are unsure which category a tip falls into, refer to the CRA's article on tips and gratuities, or speak with your accountant.
How to add tips to a payroll run
Tips are added during the payroll run, on the Hours and incomes screen. There are two ways to do it:
- Add tips to one employee at a time using the Edit panel. This is a good choice if only one or two employees received tips.
- Add tips to multiple employees at once using Grid view. This is much faster if tips need to be added to several employees in the same payroll run, since you can enter every employee's tip amount on a single screen.
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- In the navigation menu, click Payroll.
- Begin to run the payroll you want to process.
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On the Hours and Incomes screen, click Edit to the right of the employee you wish to add tips (or any other additional income) to.
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In the Edit incomes, deductions, and benefits panel, click Add income under the Additional incomes section.
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In the Select additional income type drop-down menu, select either Tips/Gratuities (Controlled) or Tips/Gratuities (Direct).
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Click out of the drop-down menu and click Save.
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Enter the dollar amount in the Amount field.
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Click Save and close.
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Back on the Hours and Incomes screen, the tip amount will appear in the Other incomes column for that employee. Hovering over the amount shows a breakdown by income type. When you are ready, click Continue to proceed to the Taxes step.
Wagepoint will automatically apply any required source deductions based on the tip type you selected. Continue running the payroll as usual.
Important: If you selected Tips/Gratuities (Direct), the tip amount will not be paid out to the employee with their pay. Direct tips are assumed to have already been received by the employee from the customer. The amount is recorded on the pay stub for reference only — Wagepoint does not calculate tax on it or include it on year-end tax forms.
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- In the navigation menu, click Payroll, and begin to run the payroll you want to process.
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On the Hours and incomes screen, click the three-dot menu in the top right, then select Grid view.
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In Grid view, click Add Income, Deductions, & Benefits in the top right.
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On the Incomes tab, scroll to Additional incomes and check the box next to Tips/Gratuities (Controlled) or Tips/Gratuities (Direct), Click Save.
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A new column for the tip type will appear on the grid. Enter the dollar amount for each employee who received tips, then click Save and close.
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Back on the Hours and incomes screen, the tip amounts will appear in the Other incomes column for each employee. Hovering over the amount shows a breakdown by income type. When you are ready, click Continue to proceed to the Taxes step.
Grid view is especially useful when the same income type (like tips) needs to be added to many employees in a single payroll run. You can also use it to add other additional incomes, deductions, or benefits in bulk.
Note: Any changes made to recurring codes in Grid view will only affect the payroll currently in progress.
Important: If you selected Tips/Gratuities (Direct), the tip amount will not be paid out to the employee with their pay. Direct tips are assumed to have already been received by the employee from the customer. The amount is recorded on the pay stub for reference only — Wagepoint does not calculate tax on it or include it on year-end tax forms.
FAQs: Tips and gratuities
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This usually means the tip was entered as Tips/Gratuities (Direct). Direct tips are not paid out to the employee through payroll; the CRA assumes the employee has already received the tip directly from the customer. The amount is recorded on the pay stub for the employee's reference only — Wagepoint does not calculate tax on it or include it on the T4.
If the tip should have been paid out through payroll, it should have been entered as Tips/Gratuities (Controlled) instead.
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What you do depends on where the payroll is in the process:
- If the payroll has not yet been approved, go back to the Hours and incomes step, click Edit next to the employee, delete or correct the tip line, and re-save.
- If the payroll has been approved but not finalized, you can undo the payroll to return it to an editable state. See Undo a payroll for instructions.
- If the payroll has already been finalized and paid out, you will need to make an adjustment. See our Guide: Adjustments for the full process.
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It comes down to who has control over the tip. If the tip is collected and allocated by the employer — such as a mandatory service charge, an employer-administered tip pool, or tips that come in on credit or debit card payments — it is controlled.
If the tip is paid directly to the employee with no intervention from the employer (for example, cash left on a table), it is direct. Refer to the CRA's guidance on tips and gratuities or consult your accountant if you are unsure.
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If neither Tips/Gratuities (Controlled) nor Tips/Gratuities (Direct) fits the way you need to track tips, you can duplicate one of the default codes or create a custom income code of your own. See Edit, duplicate, and create custom codes for step-by-step instructions.
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Under CRA rules, controlled tips are part of pensionable and insurable earnings, so CPP contributions and EI premiums are deducted on them (with matching employer amounts). Direct tips are neither pensionable nor insurable, so CPP and EI are not deducted.
If the deductions do not look right, double-check which tip type was selected on the payroll run.
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Yes. Both controlled and direct tips appear as separate line items on the pay stub so the employee can see exactly what was recorded.
Keep in mind that direct tips are shown for reporting purposes only — they are not added to the employee's net pay, because the employee has already received the tip directly from the customer.
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Yes. Wagepoint applies source deductions and year-end reporting based on how the worker is set up — as an employee or a contractor. If you add Tips/Gratuities (Controlled) to a contractor, the system knows not to apply source deductions and will include the amount on the T4A instead of the T4.