Handling “tips” correctly: What you need to know regarding taxes and how to save money!

Whether in restaurants, when taking a taxi or in hair salons: Tips or gratuities are part of the daily life and are an important income source for many employees. However, tips are not only a nice perk on the sidelines anymore. The tax and social security treatment of tips and gratuities should not be disregarded and can vary significantly depending on the professional group.

Depending on the industry, different flat rates for the treatment of tips exist. Within this blog post we discuss relevant regulations and terms at a glance.

Tips and gratuities from an income tax perspective

Under certain circumstances, tips are exempted from income tax. In order to use this income tax exemption, the following conditions must be met:

• Tips must be customary in a place. The amounts must be reasonable, and it must be common in the industry to give tips.
• Employees must receive tips directly from third parties, meaning from clients. An allocation by employers would jeopardize the tax exemption.
• Tips must be granted voluntarily. Specifications as a percentage or fixed amounts are contrary to tips being granted on a voluntary basis.
• An extra service for tips must not be expected or provided.

As long as the above-mentioned criteria are met, tips are exempt from the employer’s contribution and the municipal tax, besides the income tax.

Therefore, it is significant that tips are customary in a place, common in the industry and paid out in an appropriate amount.

Additionally, it should be reviewed and ensured that receiving tips is neither legally prohibited nor interdicted due to collective bargaining agreements. Such prohibitions exist especially for senior employees or civil servants.

Important: Furthermore, it should be noted that only tips given to employees, who receive income from an employment relationship, are income tax free.

Tips and gratuities from a social security perspective

According to section 49 para. 1 Austrian General Social Security Act (ASVG), tips are considered as remuneration from third parties and are therefore subject to social security contributions. Therefore, tips increase the general contribution base of the social security contributions for the contribution period. Regarding the specific determination, employers are required to keep detailed records in this regard.

For certain groups of employees, flat rates are in place and applicable with regards to tips. In particular, this applies mostly for industries, where tips are generally common. Followingly, you will find examples of such industries: hairdressers, hotel and catering, taxi and rental car drivers as well as cosmeticians. These flat rates also consider factors such as average tip amounts, location of the business and the type of work. Absences (such as holiday or sick leave) and possible part-time employment are also considered within the calculation of the flat rates.

Therefore, if there are no fixed flat rates for a specific federal state or a business sector or these are not taken into account, the tips are to be specifically determined, and relevant records have to be kept.

If no records are presented at the common review of wages and salary charges and contributions (GPLB audit) or there are considerable deviations, the authority can determine the amount of the received tips based on comparable businesses.

However, whether tips can be exempt from income tax and social security contributions is always to be examined and evaluated based on the specific circumstances in the respective individual case.

If you have any questions regarding the treatment of tips, do not hesitate to contact the team of People & Organisation!