As of: March 29, 2024, 12:30 p.m
By: Dieter Tannert
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In many industries, tipping is not only good manners, but is also an essential part of income. But what about taxes?
Particularly when it comes to services in personal-related professions, tipping is more than just a courtesy. In the catering or hairdressing trade, it is often quietly a very important part of the income. Previously, tips up to 1,224 euros per year remained tax-free. However, since recording tips is extremely difficult in reality and uniform collection of taxes is part of the rule of law, this limit was abandoned in 2002. Since then, tips that the employee receives voluntarily from the customer - i.e. not from the employer - in connection with their work performance have been completely tax-free. Regardless of whether the tip was paid in cash or by card or is divided from a common fund. The possibility of tax-free payments naturally aroused the interest and imagination of tax advisors.
Tips over 1.3 million euros tax-free?
Giving an appropriate tip after good service is also common practice in the catering industry. (Symbolic image) © Image Source/Imago
In a case heard before the Cologne Finance Court, it became known that a senior employee received payments of 50,000 euros and 1.3 million euros in recognition of his particularly valuable work from an obviously very satisfied shareholder of his employer. These payments were made from the shareholder's private assets and were therefore not considered to have been made by the employer to the employee. A process that is comparable to giving a tip. If people are satisfied with a service and then voluntarily give money, a tip can be assumed. The tax court, however, saw it differently and only wants to recognize a tip if it is of an appropriate amount and corresponds to custom. The plaintiff's request to have these payments tax-free as tips failed.
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Tips for the employer are always taxable
Of course, not only employees receive tips, employers as self-employed entrepreneurs also benefit from such tips. Whether the hairdresser, the innkeeper or the taxi operator. In all of these cases, the tip is not tax-free. Here, the tip provided must be declared and taxed as business income not only for income tax, but also for sales tax.
Even the toilet penny is taxable
The tax authorities also do not stop at supposedly disreputable tips, such as the so-called toilet penny. As was shown in a case heard before the tax court, the income from the tips that users voluntarily give for cleaning toilets is not that small overall. In the present case, the plaintiff had almost completely foregone any further payments from his client just to receive the toilet pennies. And with the income from tips he was even able to afford to hire staff to do the cleaning. The only question in court was whether the toilet penny was also subject to sales tax. The recipient of the money was an entrepreneur and the tip was therefore subject to income tax. However, sales tax is only due if you receive something in return for a service provided. Since the toilet users gave the money voluntarily, the plaintiff did not want to pay the sales tax. But here too, the judges had no insight and viewed the voluntary funds as a consideration and therefore subject to VAT. True to the motto that the ancient Romans already knew: pecunia non olet – money doesn’t stink