Tipping has long been a complicated but integral part of the restaurant industry. For waiters, bartenders and other employees, tips can represent a significant proportion of their total income. While tips are in many cases a welcome extra income, they come with a range of rules and challenges, especially when it comes to how they are accounted for and taxed. At the same time, there is money to be saved for many restaurants by managing the payment of tips more efficiently.
Basic tax rules for tips
In different parts of the world, tipping is handled in different ways, both socially and legally. In Sweden, tips are covered by the Income Tax Act (1999:1229), which means that they are considered a form of income and should be taxed accordingly. But the question of who should pay the tax is a little more complicated. It depends partly on how the tips are distributed, but mainly on who is responsible for distributing the tips.
In order to determine whether it is the employer or the employee who is taxed on tips, it is first necessary to assess whether the restaurant or the guest should be regarded as the provider of the tips. And in this assessment, according to the Swedish Tax Agency, it is crucial whether it is the company that distributes the tips at its own discretion or whether it is the staff that does so.
Then the restaurant has to pay tax on tips
The restaurant needs to pay tax on tips in cases where the company takes care of the tip and distributes it among the staff. In this scenario, the company is seen as the issuer of the tip, which means that the tip is classified as income for the company and as salary for the employees. This in turn means that the company is obliged to pay employer's contributions on the tips paid out.
The restaurant does not have to pay tax on tips
When staff receive a tip in cash directly from the guest and choose to handle it themselves, the guest is considered the giver of the tip, which means that the cash does not constitute income for the restaurant. This in turn means that the restaurant does not have to pay taxes or social security contributions. That responsibility falls on the employee, who needs to declare the tip as income from employment in his/her income tax return.
And now you're probably thinking:
What happens if the guest tips electronically with their card?
When the guest makes a tip with his card, the tip is credited to the company's account, which means that the staff cannot dispose of the tip without the employer's consent and involvement. Does this mean that the restaurant is seen as the issuer of the tip and therefore has to pay employer's contributions?
The Swedish Tax Agency makes no distinction between tips paid in cash or by card, as long as the employees themselves decide how the tips are distributed. Tips paid by card - in cases where the staff have their own decision on the distribution of tips - are thus not seen as an income to the company but rather as a debt to the staff. This also means that the guest is considered the issuer of the tip and that the company does not have to pay employer's contributions on the tips received by the staff. As with cash tips, it is instead the employee who needs to declare the tip as income from employment in his or her income tax return.
How to record tips
Depending on who distributes the tip and how the actual payment is made, the accounting and bookkeeping may differ technically.
Tips in cash
If staff receive tips in cash and it is the staff themselves who decide how their tips are distributed, the company's accounts are unaffected. It can be seen that these events take place outside the company's books, as it is the guest who is the spender and the employee who is obliged to declare the tip as income from employment in his income tax return.
Tips paid by card or and paid electronically
When the tip is paid by card but the staff decides how to distribute it, the amount of the tip becomes a debt of the restaurant to its employees. The amount of the tip should therefore be recorded as a liability in the restaurant's books. Then, when the restaurant settles its debt to the staff, it needs a supporting document in its accounts showing the persons who received the payment. The payment voucher needs to clearly indicate who the recipient is. It is not enough, for example, to write "staff" as the counterparty, as non-group staff is not a counterparty in the form of a natural or legal person.
Tips paid by card and paid in cash
It is perfectly acceptable for restaurants to allow their staff to take cash directly from the cash register when tips are paid by credit card. Provided that the distribution of the tips is under the control of the staff, the accounting process is technically very similar to the scenario where the tips are paid electronically. The restaurant will still need to record the amount of the tip as a debt to the staff and establish a record showing who has been reimbursed when the debt is settled, i.e. taken from the cash register.
Something that the Swedish Tax Agency points out, which is important to consider, is that it is not allowed to handle the tip given at the time of card payment as change for the customer and then to get around the bookkeeping.
As we have seen in this article, tipping, which is basically a very nice thing to do, can also create some headaches for the uninitiated when it comes to administration and accounting. But as we have also seen, restaurants can save money by avoiding "unnecessary" employer contributions. Therefore, it is particularly important to keep track of the accounting and tax rules on tips.
To read more about tips and accounting, we refer to the Swedish Tax Agency. Also remember to always consult an accounting expert before deciding how to manage and account for your tips.
- As a restaurant owner, do I have to declare all tips received?
It depends entirely on who is the issuer of the tip and who decides on the distribution.
- How can digital tools help me with tip management?
Digital solutions can automate many of the time-consuming and complex steps in managing tips, from collection to accounting and tax payment.
- What should be included in a tipping policy?
A tipping policy should clearly describe all aspects of the management of tips: collection, distribution, accounting, and any specific guidelines that the restaurant follows.
- Is there VAT on tips?
No, there is no VAT on voluntary tips.