Tips and Gratuities – Payroll Considerations and Legislation Changes

What Are Tips And Gratuities?

Tips and gratuities have been defined as ‘money exchanged from customer to service provider which is not legally required by the agreement for purchase of the service’ (Casey, 1998, as cited in LPC NO. 10, 2018). Generally speaking, they are relatively low value payments given by customers to workers in the service and hospitality industries in excess of the fee due for the transaction which has taken place.  The frequency and value of such payments is entirely up to the customer.

Current Practices In Relation To Tips And Gratuities

Tips and gratuities are not specifically covered under the Payment of Wages Act 1991, however the Revenue Tax & Duty Manual Part 42-04-35A states that tips ‘paid to the employer and subsequently paid out to an employee should be included in pay for the income tax week or month in which they are paid out.’  This means that tips and gratuities paid to the employer and subsequently paid to the employee should be considered as pay for PAYE purposes and taxed accordingly, although the National Minimum Wage Act 2000 prevents employers from including these payments in the calculation of the National Minimum Wage.  A service charge included as part of the bill should also be taxed as pay if it is paid out to an employee, but unlike tips, these payments can be included in the calculation of minimum wage.

From a wider taxation point of view, it’s worth pointing out that a service charge which is shown on the bill is subject to VAT at the reduced rate of 13.5%, however, tips and gratuities offered voluntarily by the customer are outside of the scope of VAT.

Tips And Gratuities – Current Issues

Currently there is no legislation which obliges employers to pass on any tips received by them to their staff, therefore a customer has no way of knowing if the tip they left was actually given to the intended recipient(s) and the worker has no protection if their employer chooses to keep some or all of the tips left by customers.

Proposed New Measures In Relation To Tips And Gratuities

Proposed new measures announced by the Minister for Employment Affairs and Social Protection, Regina Doherty TD, aimed at ensuring employees receive the tips due to them and providing protections for low paid workers, are expected to include the following:

• The Payment of Wages Act 1991 will be amended to ensure that tips and gratuities cannot be used to make up contractual rates of pay; and
• Employers will be obliged to clearly display their policy on how tips, gratuities and service charges are distributed.

Source: welfare.ie.

When Will The New Tips And Gratuities Measures Be Implemented?

It is currently unclear as to how soon the proposed measures will be introduced, however there was an announcement on 8 July 2019 which stated that the Government has given approval on a draft Heads of a Bill to amend the Payment of Wages Act 1991, which allows the Minister’s Department to draft the required legislation.

How EisnerAmper Ireland Can Help

At EisnerAmper Ireland, our dedicated team of Tax professionals possess the knowledge and experience required to provide guidance and the intelligent solutions you need when either setting up, or running a business, in Ireland.  We tailor our offering to your needs, ensuring you receive the best advice at the appropriate time.
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Benefit in Kind (BIK) – Employer Overview

What Is BIK?

As a general rule, any benefit or perquisite, other than cash, which an employer provides for an employee would be considered a BIK once it has monetary value.  It is the responsibility of the employer to calculate the value of the BIK and deduct the appropriate employment taxes via the PAYE system.  Benefits given to an employee’s spouse or family members would also be considered BIK.

Taxation Of BIK

Tax must be deducted on the actual value of the benefits provided, unless the actual value is not known.  In this case, tax must be deducted on the estimated value of the benefit.

The value of the benefit must be added to the employee’s pay as a notional pay element in the pay period in which the benefit was provided.  PAYE, PRSI and USC are then deducted from the total value of the employee’s pay plus the BIK.  This should then be reported to Revenue in a payroll submission either on or before the date the employee receives their net salary payment.

How Do You Calculate BIK?

Some BIKs have specific rules which must be followed in order to calculate the taxable value.

– Example 1: How To Calculate BIK On A Company Car

The taxable value (known as the cash equivalent) is based on a percentage of the Original Market Value (OMV) of the car, less any discount received when the car was purchased*.  The percentage is dependent upon the number of business kilometres driven by the employee each year, as shown in the following table:

(Source: revenue.ie)

Journeys to and from an employee’s normal place of work are not considered business travel.

Employees who work, on average, at least 20 hours per week, whose business kilometres are between 8,000 and 20,000 km per year and who spend at least 70% of their time away from their normal place of work can avail of a 20% reduction on their cash equivalent value.

– Example 2: How To Calculate BIK On Health Insurance

If you purchase health insurance on behalf of an employee this would be considered a taxable BIK.  Although the amount paid by the employer to the insurer is the net cost of the policy, the value of the BIK for the employee is based on the gross cost. The employee gets tax relief by submitting a claim for a Medical Insurance Relief tax credit via their Revenue account at the end of the tax year.

Recent BIK Updates

Before PAYE modernisation, corrections to estimated BIK values could be made at any point in the tax year up to the filing of the annual P35 return.  Since 1 January 2019, when the actual value of a benefit becomes known after BIK has been calculated on an estimated amount, the correction must be made in the next available pay period.

BIK vs Non-Taxable Benefits

Although in general all benefits are taxable, there are some exceptions to this rule.  The following non-exhaustive list showcases some of the items which can be provided tax-free, provided certain conditions are met:

• Expenses – Expenses must be incurred wholly, exclusively, and necessarily in the performance of the employee’s duties and must be vouched with receipts.
• Long Service Awards – The award must be a ‘Tangible Article’, i.e. not cash. The cost to the employer must be less than €50 per year of service and the period of service must be over 20 years. The employee must not have received a similar award within the previous 5 years.
• Relocation Expenses – Only expenses which are a direct result of the change of residence can be repaid tax-free. More information on Relocation Expenses can be found here.
• Travel Passes – The travel pass must be issued by a public or private operator who holds a valid licence.
• Bicycles & Equipment – The cost cannot exceed €1,000 and goods must be purchased from a registered supplier.
• Phones & Computers – Mobile phones, landlines, internet connections and computer equipment can be provided when primarily for business use.

The information above is for guidance purposes only.  Tax advice should always be sought before providing benefits and reimbursements to employees without deducting employment taxes.

How EisnerAmper Ireland Can Help

The taxation of employee benefits can be challenging, particularly for non-resident employers and new businesses, although with continuously evolving legislation all employers should review their practices regularly.

At EisnerAmper Ireland, our dedicated team of payroll professionals and tax advisors are on hand to offer accurate guidance and advice on the taxation of benefits, as well as providing support and payroll processing services to both new startups and established businesses.

Learn more about our Outsourced Payroll Services here.
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*Discounts of more than 10% must be approved by Revenue.

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