Basic tax rules for gratuities

In different parts of the world, gratuities are handled in different ways, both socially and legally. In Sweden, gratuity is covered by the Income Tax Act (1999:1229), which means that it is counted as a form of income and must be taxed accordingly. But on the question of who will pay the tax, it gets a little more convoluted. It depends partly on how the drinks are distributed, but above all on who responsible to distribute the drink.

In order to determine whether it is the employer or the staff who pays the gratuity, it is first necessary to assess whether it is the restaurant or the guest who should be seen as the issuer of the gratuity. And in this assessment, according to the Swedish Tax Agency, it is decisive whether it is the company that distributes the drink at its own discretion or whether it is the staff who does it.

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Then the restaurant has to pay tax on gratuities

The restaurant has to pay tax on gratuities in cases where the company takes care of the drink and distributes it among the staff. From the Skatteverket's perspective, the company in this scenario is seen as the issuer of the gratuity, which means that the drink is classed as income for the company and as a salary for the employees. This, in turn, means that the company is obliged to pay employer contributions on the gratuity paid.

The restaurant doesn't have to pay tax on gratuities.

When staff receive a cash tip directly from the guest and choose to handle it, the guest is considered the issuer of the gratuity, which means that the cash does not constitute income for the restaurant. This, in turn, means that the restaurant does not have to pay taxes or employer contributions. That responsibility falls instead on the employee, who needs to record the gratuity as income from service in his income tax return.

And now you're probably thinking:

What happens if the guest gives their tip electronically with their card?

After all, when the guest drinks with their card, the gratuity enters the company's account, which means that the staff cannot dispose of the drink without the consent and participation of the employer. Does that mean that it is the restaurant that is seen as the issuer of the drink and thus needs to pay employer contributions?

Not necessarily.

The Swedish Tax Agency makes no difference whether the tip is paid in cash or by card, as long as it is the staff who decides how the drink is distributed. Thus, gratuities paid by card - in cases where staff have their own control over the distribution of drinks - are not seen as income to the company, but rather as a debt to the staff. This further means that it is the guest who is considered the issuer of the drink and that the company thus does not have to pay employer contributions on the gratuity the staff receives. As with cash gratuities, it is instead the employee who needs to record their gratuity as income from service in their income tax return.

How the drink is recorded

Depending on who distributes the drink and how the actual payment is made, the accounting and the accounting may differ in technical terms.

Tip in cash

If employees receive a cash tip and it is the staff who decide how to distribute their gratuities, the company's accounting will be unaffected. It can be seen that these events take place outside the books of the company, since it is the guest who is the publisher and the employee who is obliged to include the gratuity as income from service in his income tax return.

Tip paid by card or and paid electronically

When the gratuity is paid by card but it is the staff who decides how to distribute it, the amount that constitutes the gratuity becomes a liability for the restaurant towards its employees. The amount of the drink should thus be recorded as a liability in the restaurant's books. When the restaurant then settles its debt to the staff, they need a document in the accounts showing the persons who received the payment. The payment receipt must clearly state who is the beneficiary. For example, it is not enough to write “the staff” as a counterparty, since non-group personnel are not counterparties in the form of a natural or legal person.

Tip paid by card and paid with cash

It is perfectly okay for restaurants to allow their staff to take cash directly from the cash register when the gratuity has been paid by credit card. Provided that it is the personnel who control the distribution of the drink, the accounting will be technically very similar to the scenario when the drink is paid electronically. The restaurant still needs to record the amount of drinking as a debt against the staff and draw up a supporting document showing who has received compensation when the debt is settled, that is, taken from the cash register.

Something that the Swedish Tax Agency points out, which is important to keep in mind, is that it is not allowed to handle the gratuity indicated at the time of card payment as change to the customer and then to get around the accounting.

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Conclusion

As we have seen in the article, gratuities, which are basically something very lovely, can also create some headaches for the uninitiated when it comes to administration and accounting. But as we've also seen, restaurants can save money by avoiding “unnecessary” employer contributions. Therefore, it is especially important to keep track of the accounting and tax rules surrounding gratuities.

To read more about gratuities and accounting, please refer to The Tax Agency. Also remember to always consult an accounting professional before deciding how to manage and account for your gratuity.

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FAQ

- As a restaurant owner, do I have to account for all gratuities received?

It all depends on who is the issuer of the drink and who decides on the distribution.

- How can digital tools help me with drink management?

Digital solutions can automate many of the time-consuming and complicated steps of tip management, from collection to accounting and tax payment.

- What should be included in a drinking policy?

A drinking policy should include a clear description of all aspects of the handling of gratuities: collection, distribution, accounting, as well as any specific guidelines that the restaurant follows.

- Is it VAT on gratuities?

No, there is no VAT on voluntary gratuity.

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