Settling the Tip Splitting Debate 2
In our previous blog post, we already agreed that your customers want to be sure that they are rewarding good service; at the same time, your employees want to be sure that their hard work is recognised, and don’t want to feel that their earnings potential is restricted.
We already looked at what customers, staff, and management want from tipping. This is what you need know about the tax implications.
3. Tips can be Taxing
The added complication for determining your tipping system is how staff tips are treated in terms of tax.
There are a number tax rules that have been outlined by HMRC. Tips must be administered by restaurants ‘at arms length’. Otherwise, the money given by customers becomes taxable as income for your business.
The key points to consider on how tips are treated by the taxman are:
- Income tax is due on all tips regardless of how they are administered
- If tips are collected by the restaurant, then income tax should be deducted via PAYE
- If the restaurant management decides on how tips are distributed, then national insurance is due
- A compulsory service charge is not considered a tip by HMRC, so it’s treated in the same way as ordinary wages
4. So what to do about tipping?
There’s no correct answer on how you should administer the tipping system at your restaurant. Your business is unique. It’s clear, however, that you can’t just ignore the issue. Otherwise, either your service, staff motivation, or both will suffer.
Do nothing and you default to the status-quo of waiters keeping all of their tips: Tax is easier as declaring tips is the responsibility of your employees, but will this system demotivate staff who work in the kitchen or have shifts at less busy times?
How to split your restaurant's tips isn’t easy. Every business is different and there isn’t a blanket answer that applies in all cases. Get it right and you’ll have a happy and motivated staff, as well as customers who get to enjoy great service - and are happy to reward it.
With the appropriate tips system in place, your restaurant will benefit in the long run. Spend some time working out the best system for your circumstances: talk to your employees and your accountant and establish what will work best for your restaurant.
The right tipping system is a crucial part of a successful, thriving restaurant.