The question of whether it is mandatory to declare the tips received by employees is always there. In fact, it is one of the most common queries in the hostelry. As well as in other sectors, such as cabs, tourism, home deliveries, etc.
Traditionally, tips are usually given directly by customers in gratitude for the service provided. In Spain, it is the customer who traditionally decides how much to leave. However, percentages are gradually being imposed, similar to what happens in other European countries or even in the U.S. In these cases, we are talking about percentages ranging from 5%-10%, even up to 20%.
However, entrepreneurs should not forget their tax obligations as employers and responsible for the business in question.
Specifically, we will try to answer the doubts, focusing on the hospitality sector. Where the traditional “pot”, which left no trace, is being replaced by the “include it on the card” with a rounding up of the bill.
Other sectors either have their own regulation, as is the case with casinos. Or they require another type of analysis.
Declare the tips
Let’s look at this obligation to declare tips from different perspectives, both from a tax and labour standpoint.
Regardless of whether the tip is received in cash (without trace) or via card payment (with trace).
And without going into how much should be left as a tip, which is another very topical debate. Since this article is directed to clarify doubts of how to proceed with the tips, of the receivers of the same ones, not of the issuers.
Taxation of the employee. IRPF
For tax purposes, the obligation to declare the tips is not in doubt.
Although case law has maintained contradictory criteria in the past with respect to the consideration of tips as remuneration for work.
Pursuant to article 17 of the Personal Income Tax Law, tips are considered to be employment income for the employee. In addition, the amounts paid to personnel as tips must be included in the payroll and be subject to withholding by the employing entity. Insofar as they are considered as employment income and are not simple payment mediation operations.
Thus, Article 76 of the Personal Income Tax Regulations mentions tips and stipulates for employers “the obligation to withhold and pay on account when they pay to their personnel amounts disbursed by third parties as tips, remuneration for services or other similar items”. Thus, it would be taxed for Personal Income Tax through the payroll of each employee.
According to the General Directorate of Taxes (DGT), the aforementioned tips will be considered as variable labor remuneration for the purpose of calculating the percentage of withholdings to be paid to each of the employees. The withholding calculation system will be the general method, considering the following aspects:
- The withholding percentage will be determined based on the total amount of the remuneration paid to each of the workers. Both fixed income and foreseeable variable income (tips).
- The amount of foreseeable variable remuneration to be taken into account in the fiscal year may not be less than that actually obtained in the previous year.
- The previous rule can be broken when circumstances occur that allow to objectively accredit a lower amount.
Taxation of the employer. Personal Income Tax (IRPF) / Corporate Tax
The employer’s taxation of tips received and distributed to employees must also be analyzed. This taxation will be in the IS in the case of companies, or in the IRPF in the case of employers who are individuals.
The Audiencia Nacional in a 2001 ruling considered that the amounts received by the company (restaurant) that are accounted for as tips (for the difference between the total amount received from customers and the amount of sales) and that, subsequently, are distributed among the employees (waiters) do not qualify as taxable income. Nor, subsequently, when they are distributed among the employees, do they qualify as a deductible expense. To the extent that there is a direct relationship between the customers and the referred employees, being the employer company a mere intermediary between both. Therefore, the employer would not be taxed on these tips.
The key to this ruling is that in the case in question there has not been any instruction given by the company’s management regarding the way in which the tips are to be distributed among the employees.
Value added tax VAT
Tips are not considered transactions subject to VAT.
According to the VAT Law, the taxable basis is constituted by the total amount of the consideration for the transactions carried out.
The Court of Justice of the European Communities in its Judgment of March 3, 1994 concluded that the tip paid spontaneously and freely by the customer to some of the employees does not form part of the taxable basis for VAT, since it is a purely voluntary and random payment, the amount of which is practically impossible to determine.
This means that the tips do not constitute a taxable income, so the employer will not have to include it in the quarterly self-assessments and the same will not be considered as income.
In addition, the AEAT in several consultations has so determined.
Declare the tips for Social Security purposes
The Fourth Chamber of the Supreme Court has reiterated that tips are not considered as a salary, since they do not constitute a consideration due by the company for the work. Rather, it is an income produced by the generosity of a third party, i.e. the customer.
The fact that it is the company that collects and distributes the tips according to the system agreed among the workers does not change the nature of the tip, turning it into a salary. Since its origin, amount and periodicity in its maturity, cannot give rise to its nature to be considered as a supplement that is received by reason of the quantity and quality of work.
Therefore, unless there is an agreement to the contrary, express regulation, collective agreement or company agreement (as in the case of gaming casinos), given that it is not considered a salary, it would be exempt from paying social security contributions.
However, it is recommended to analyze each situation for its assessment, since sometimes the Labor Inspection and for certain sectors, has considered that the nature of the tips are part of the set of the emoluments received by the employees, being in this case subject to contribution.