Taxation of Tips: Every Month Can Bring Tips, Gratuities, and Tips of Around 300 Euros

A tip is an addition that a satisfied customer voluntarily adds to the charged price, as a reward for individuals for good service. It is usually given in hospitality for consumed food, drinks, and hot beverages, much less frequently for accommodation services in hotels or with private renters.

In addition to hospitality, in Croatia, giving rewards for good service is common for hairdressing and cosmetic services, sometimes also for services of repairing household appliances and apartment renovations. Tips are rare and almost never given for transportation services, and exceptionally for services related to vehicle maintenance and repair. It is also not common to give tips for educational and medical services, at least not as public information.

Rules and Exceptions

Tips in hospitality have been a direct reason for defining the status of such employee income according to income tax regulations and mandatory contributions, as proposed in the new round of tax reform set to start on January 1, 2024. Tips given in cash remain under the tax radar, and it is highly likely that this will continue to be the case after January 1, 2024. Currently, the problem of taxation exists with tips paid by credit cards because the amount of the fiscalized invoice for the service performed is less than the amount that the card organization transfers to the entrepreneur, leading to discrepancies between the charged and collected income. The collected income is greater than the sum of issued invoices.

During the tourist season, Christmas parties, confirmations, and similar celebrations, the discrepancies for large hospitality entrepreneurs amount to tens of thousands of euros per month. According to current regulations, when an entrepreneur pays out such collected income to employees, they are obliged to pay all public contributions prescribed for salary payments, which significantly reduces the net income of workers. The only exception is the possible payment of a reward for work results up to the prescribed annual tax-free amount of 995.43 euros, which employers generally use for other purposes and pay as additional salary, as an annual bonus for work results, etc.

Only Fiscalized

According to the proposed amendments to the Income Tax Act, from 2024, entrepreneurs will be able to transfer amounts received as rewards to employees for good service tax-free, up to the prescribed amount. The proposal does not specify a tax-free amount, but a figure of 3360 euros per year has been mentioned in public. If we assume that an employee works the entire year and takes one month of annual leave, it results in the possibility of a tax-free monthly income of more than 300 euros.

Employees will only be able to receive tax-free payments for amounts recorded through the fiscalization system. If an amount recorded in the fiscalization system exceeds the prescribed tax-free amount, the difference will be taxed at an income tax rate of 20%, considered final income, and will not be subject to cumulative annual income tax calculation. The total amount of income from tips, both tax-free and taxable parts, will be exempt from the obligation to pay contributions. Employers will be required to submit data to the Tax Administration once a month regarding the rewards paid to employees on this basis.

To comprehensively round off the tax regulations regarding income given by third parties as a reward for good service, regulations on fiscalization, regulations on mandatory contributions, and regulations governing the technique and manner of reporting employee income in the JOPPD form submitted by employers to the Tax Administration will be amended.

Tips via Card

Although the tax characteristic of tips is primarily in the interest of the hospitality industry, tax regulations are not limited only to hospitality providers. The new characteristic of rewards that employees will receive from third parties will equally apply to all service activities. Due to the new tax attractiveness of this income and the proverbial ingenuity of Croatian entrepreneurs, a change in the behavior of users and service providers in other sectors is possible.

How will tips given be treated by entrepreneurs who voluntarily pay an additional amount on the issued invoice for good service as a reward to the employees of the service provider? According to the announcement, tips given for good service, i.e., amounts that the entrepreneur pays to the card organization through the invoice for the received service, will not be recognized as tax-deductible expenses. For example, if an entrepreneur pays 1100 euros for a service of hosting business partners on an incoming invoice of 1000 euros, 50% of the representation invoice, i.e., 500 euros, and all 100 euros of the tips given are considered non-deductible expenses and increase their taxable base.

How do the amounts collected as rewards for good service affect the VAT obligation of the entrepreneur who issued the invoice? According to the interpretation of the Tax Administration, a reward for good service intended by the customer for the workers who performed the service is not considered a voluntary increase in price and is not subject to taxation by VAT.