The rules around tipping and service charges in the hospitality industry can be somewhat daunting, when all you want to know is how to pay out tips to your staff.
New legislation now makes it compulsory for employees to receive all tips, gratuities and services from customers, without the employers holding any back for themselves.
But how do you manage this, and what are the tax implications? Firstly, what counts as a tip or gratuity?
What counts as a tip, gratuity or service charge?
This is where a customer makes a payment on top of the basic charge for their service.
There are different ways that the payment can be made, including the following:
- Mandatory service charge (already included in the bill)
- Discretionary service charge (added to the bill, but you choose to pay)
- Gratuity paid to the employer (this will be as part of your payment for the service, and could be cheque or card payment)
- Tip paid into a staff box or similar
- Tip/gratuity handed directly to an employee
- Tips left on the table when you leave the establishment
What do you have to pay your employees?
All tips, gratuities and service charges should be collected and shared out to your employees.
As the business owner, you shouldn’t hold back any of the tips for yourself.
How do you record the Tips?
Cash tips/gratuities
- All cash tips/gratuities should be handed in and collected together.
- They are then shared out at the end of the day, week or month.
- Records should be kept of the total collected, and how they’re shared out to your employees.
Card or cheque tips/service charges
- Your software should record all of these tips separately
- These can then be reported on daily, weekly or monthly.
- Your software should generate reports of the total collected, and how they’re shared out to your employees.
How are tips and gratuities taxed?
If you have a proper Tronc Scheme where tips are collected and shared out to your employees:
The tips should go on the employees’ payslip, with PAYE tax deducted.
There will be no National Insurance deducted.
If employees keep tips given to them, and don’t hand them in:
The tips should be declared to HMRC on the employee’s personal tax return, or reported to HMRC.
If the tips are allocated by the employer:
In this case, National Insurance for the employee and employer is due.
This is because the employer is initially collecting the tips, and then deciding how to allocate them to employees.
Where the employer makes up the shortfall in tips
This could be where there is an agreement between employer and employee that tips should reach a minimum amount for each employee.
Because the employer as a contractual obligation, these aren’t tips, and will be taxed and NIC for the employer and employee.
How can I be sure I’m doing it right?
The best thing to do is seek advice, but HMRC also has lots of examples showing different scenarios of how tips are collected, and how they should be taxed.
Check out our blog on how Tronc schemes work, and who is responsible.
We can recommend Dataplan Payroll and Troncmasters for guidance, and to manage your Tronc scheme
This works really well, as the Troncmaster provides reports of tips to be added to the payrolls that we operate for our own clients.
Get in touch if we can support you with your payroll, or other finance needs.
