Tax treatment of tips

Tax treatment of tips

Payroll / eTorQue, Tax

It is imperative that the facts and circumstances of the tipping arrangement be considered before deciding what the tax position is for the employer and the waitron. The reason for this is because the arrangement will determine who is beneficially entitled to the tips and whether the employer is acting as a conduit for the tips or a receiver in their own right. In the conduit approach the employer collects tips from patrons and then distributes them to the waitrons. This can take the form of tip payments that are specifically due to them as individuals, or according to a pre-agreed formula where the gross tips are divided between waitrons and other restaurant staff.

Alternatively, the employer may not act as a conduit. The tips may be received by the employer personally, with full authority to decide on the portion of the tipping pool which will be distributed to employees and the amount that a particular employee will receive. The employer may also agree in advance that employees will receive a higher hourly wage rate and that all tips will accrue to the employer.

In the case where the employer acts as a conduit they have no controlling authority in relation to the payment of or the amount of the tip, and there is no responsibility or obligation on the employer to manage the tip in the best interests of the recipients. The owner is merely holding the funds for the recipient and performing a distribution role for the patron. Accordingly, in these circumstances the employer would not constitute an ’employer’ as defined for the purposes of Employees Tax. PAYE would therefore not be deducted.

In the situation where the owner receives the tip for his own benefit and subsequently decides to pay the recipient a tip in his own capacity as employer, the position is different. When paying the recipient the tip the employer is acting as a principal because he is acting in his own capacity and has exercised his own controlling authority in deciding firstly to pay the recipient a tip, and secondly in deciding on the amount of the tip. Accordingly, in these circumstances, the employer would constitute an ’employer’ as defined for Employees Tax purposes and PAYE would need to be deducted.

It is important to note that in cases where the waitron receives a tip directly from a patron or from the employer where they are acting as a conduit for the distribution of the tips, these tips must be included in the recipient’s ‘gross income’. This means that the onus is on waitrons and other restaurant employees to declare the total amount of tips received to SARS when completing their annual tax returns.