In many professions (hospitality, hotels, taxi services, etc.), tips represent an important source of income alongside the paid main service. Despite the familiarity of the topic, failures repeatedly occur in the taxation or recording of tips received. These avoidable errors often entail serious consequences for the affected business, such as estimated assessments, fines (up to €25,000), or even tax criminal proceedings. For this reason, this article addresses the correct taxation and recording of tips.
Tips for Employees
As an employee in the public or private sector, one is entitled to all benefits associated with the salary (§ 19 Abs. 1 S.1 Nr. 1 EStG). This also includes payments from third parties (e.g., tips). In particular, tips—whether paid in cash or non-cash—are tax-free and have no monetary limit (§ 3 Nr. 51 EStG). However, this applies only provided that certain legal conditions are met. Specifically, the tip is only tax-free for employees if it is paid in connection with a service rendered by the employee. This means that the tip is intended to express a third party's satisfaction with a personal service performed by the employee. Furthermore, the tip must be paid voluntarily by the customer (i.e., without any legal entitlement) and in addition to the amount that is owed for the work performed anyway. Consequently, service surcharges listed on the menu do not count as tax-free income for the employee. Personal contact with the employee who is to receive the tip is not strictly required, so kitchen staff can also benefit from a third party's tax-free tip. It should, however, be noted that if the employer initially retains the tip and then decides which share is due to the employees, the tip becomes taxable. In addition, no record-keeping obligation has previously existed for tips paid to employees, whether in cash or non-cash form. However, the tax authorities now stipulate that, with the introduction of the electronic cash register and the technical security device (TSE), this exemption may no longer apply. Accordingly, tips paid in cash should be recorded as a separate business transaction in the cash register if the tip is not clearly separated from the cash balance. Non-cash tips (e.g., EC card, credit card, etc.) must be secured via the TSE so that traceability by the tax office can be ensured.
Tips for Entrepreneurs
Tips paid to entrepreneurs continue to be recorded as business income and are therefore taxable. In addition, a record-keeping obligation strictly applies. The table below indicates how the record-keeping obligation can be fulfilled with the various types of cash registers:
Recording System
Documentation
Electronic recording system without TSE
Obligation to record on a receipt within the electronic recording system
Electronic recording system with TSE
Obligation to record on a receipt within the electronic recording system and logging within the TSE
Open cash register with individual records
Documentation on the original receipt
Open cash register without individual records (cash report)
Counting of the cash balance including tips and documentation in the cash report (tips may be noted separately)
Frequently asked questions
Frequently asked questions
Are tips received by employees tax-free?
Yes, tips paid to employees are tax-free without limit under § 3 Nr. 51 EStG, provided they are paid voluntarily by a third party in connection with a service and in addition to the wages owed. Service charges that are fixed on the menu do not qualify and are taxable wages.
When does a tip paid to an employee lose its tax-exempt status?
The tax exemption no longer applies if the employer first retains the tip and decides on its distribution to employees. In this case, the tip is treated as taxable wages. Mandatory service charges are likewise not tax-exempt.
Must tips paid to employees be recorded?
In principle, there was no recording obligation for tips paid to employees. However, with the introduction of electronic cash registers with a certified technical security module (TSE), the tax authorities now require cash tips to be booked as a separate transaction unless they are clearly separated from the cash on hand. Non-cash tips (EC or credit card) must always be secured via the TSE.
How are tips paid to business owners treated for tax purposes?
Tips paid to business owners (e.g. sole proprietors, principals) always constitute taxable business income. A recording obligation applies without exception and must be fulfilled depending on the cash register system in use. The tax exemption under § 3 Nr. 51 EStG applies exclusively to employees.
How must tips be recorded in an open cash register?
With an open cash register and itemized records, tips must be documented on the original receipt. Without itemized records, the cash balance including tips is counted and documented in the cash report; individual tips should be noted separately.
What consequences may arise from incorrect recording of tips?
Failures may lead to additional tax assessments by the tax office, fines of up to €25,000 and, in extreme cases, criminal tax proceedings. Proper separation and documentation of tips is therefore essential to avoid these risks.