Why does Square charge fees on tips?

The fee is on the whole charge

When a customer taps their card for a $40 coffee order and adds a $10 tip, Square processes one $50 payment. Square's processing fee, 2.6% + 15¢ for an in-person payment on the standard plan, is calculated on that $50, not on the $40. That's $1.45 on the whole charge.

The tip is a fifth of the charge, so a fifth of that fee, about 29¢, is the cost of processing the tip. Round it off and the rule of thumb is simple: on a $10 card tip, Square keeps about 26¢ and you pay your employee $10.

This isn't unique to Square. Every card processor charges on the gross amount. It's just more visible on Square because the fee comes straight out of your deposit before it reaches your bank.

Why it adds up

Twenty-six cents sounds like nothing. The reason it matters is volume. A busy café takes hundreds of card payments a day, and nearly all of them carry a tip.

Here's a worked year for a single-location café:

Across eight employees that's roughly $330 each per year, or about $13 on a biweekly check. Small per person; real money for the owner; and invisible until somebody sits down and works it out.

Why nobody notices

Square's deposit shows a single net figure. Square's tip reports show the tips customers typed in. Neither one shows you the fee on the tips as its own line, and neither one splits it by employee. So the money quietly leaves with the processing fee, and the tips go out in full at payroll.

Most owners who do notice end up rebuilding the number in a spreadsheet: export the payments, export the timecards, work out each employee's share, apply a percentage. It's an afternoon per pay period and it's easy to get wrong, because the real fee varies by payment (the 15¢ is a bigger share of a $4 coffee than a $40 lunch).

Getting the exact number

Better Tips reads the fee Square actually recorded on every payment, works out the share that fell on the tip, and splits both the tip and the fee between whoever was clocked in. The result is one report per pay period: hours, card tips, Square's fee and net tips for every employee, to the cent, with the math shown on every row. Reading your report explains each column.