Hi @whitehartva. Usually I don’t jump into the tip limit waters, but in this case it is a subject that I’ve spent some time researching to see what was going on. So I’m going to share the results of my research, which I did at the request of a friend who has a service business and ran up against tip limits when trying to record tips left by generous clients (not with Square, but with another similar card processor).
First, to answer you question, there is no work-around. Square’s limits are Square’s limits, and you can’t get past them.
The rest of this post will hopefully give you some insight into why these limits exist, and like I said Square is by no means the only card processor who has limits in place. First, it helps to understand that while we as Square sellers are’t subject to normal fees like interchange fees, Square still is. In order to keep their fees to us low, they have to control their interchange (and other) fees as best as they can. If they don’t they will lose money and they will be forced to raise our rates, something that none of us want.
Visa, Mastercard, Amex, and others, have what are known as tip tolerances. These are an unpublicized percentage that they expect for tips in various industries. I know food/beverage best because that is my business, and for that line the tip tolerance is generally 20%, give or take. If we record a tip that is much higher than that (yes, even 5% more) then that transaction could be subject to audit or, even worse, automatic chargeback by Visa, MC, etc. Then you have to go through a painful and drawn-out process of proving that you weren’t doing something shady before they will give you your money back.
When Chip & Pin cards started being issued, Mastercard removed most of their tip tolerances, but that relaxation ONLY applied to Chip & Pin cards. The US doesn’t use those, because our federal government didn’t want to mandate them — we use Chip & Signature (or no signature) cards. The EU and most foreign banks issue Chip & PIN cards so they have a better playing field regarding over-tips.
To make a long, complicated story rather short, if Mastercard, etc, detect regular tips over the tolerances, they usually increase the interchange and other fees for the business submitting those. This is where Square comes in. We, as sellers, DO NOT get charged the increased interchange fees — Square, who is the customer that Mastercard and Visa see, does. If Square’s interchange fees go up — and remember that interchange fees are the biggest share of all card fees — then eventually Square will only be able to eat those for so long before they increase rates for every Square seller. So Square, like most card middlemen, imposes limits to keep themselves safe and to keep our rates as low as they can.
Recently, there was a big splash in the news when OnlyFans.com started limiting tips that could be received by their content creators. This had partly to do with what I explained above, but it also had to do with the fact that some OnlyFans.com creators were actually using “tip income” to launder money and OnlyFans was coming under increased scrutiny.
Please understand that I am in no way implying that you, as a seller, are doing anything wrong. But what is happening here is that all of us end up paying in some way for the bad actors who try to game the system. It’s a sad, but very true, fact of life.
I hope this helps you understand what is going on. I’ll end by saying that this is the reason that many businesses prefer a cash-only (or cash-tip-only) arrangement. However, even that has its drawbacks since the IRS ultimately will red-flag what it considers to be excessive tips, too. Many shady businesses have tried to use that loophole to hide business income as personal tip income, and the IRS caught on very quickly.
Here’s one good article of many that I found in my research.
