Tips are a daily occurrence especially in the food and restaurant industry. And even outside the hotel and entertainment industry it is not uncommon to tip somebody as an immediate way of showing appreciation. Tips have also most recently garnered attention during the presidential election race. All the more reason to give this income item a closer look.
In the US, employees who receive cash tips of $20 or more in a calendar month are required to report the total amount of tips they receive to the employer. Employees who receive tips of less than $20 in a calendar month aren’t required to report but must include the amounts as income on their tax returns.
Cash tips include tips received directly from customers, tips from other employees under any tip-sharing arrangement, and charged tips (for example, credit and debit card charges). Both directly and indirectly tipped employees must report tips received to their employer.
Tips are not to be confused with service charges added to a bill. Service charges can be large party charge (restaurant), bottle service charge (restaurant and night-club), room service charge (hotel and resort), contracted luggage assistance charge (hotel and resort) or mandated delivery charge (pizza or other retail deliveries). Those service charges are regular non-tip wages and subject to Social Security tax, Medicare tax and federal income tax withholding.
In Germany the income tax rules regarding tips are different. First, tips usually are considered income. However, this income is considered tax-free and the tax-exemption does not hinge on any Euro amount per month or so. For this reason skilled waitresses can easily double their regular pay tax-free – or even more. Things only get hairy once the occasion or the amount of tip you receive is clearly different enough to make one wonder whether this is still a “tip” as most of us understand the concept. There is no hard line in the sand, which tells you what makes a tip and what not, but a recent court ruling has decided that a €1,3 million payment – even if all other requirements are met, such as voluntary payment for a service provided without legal obligation – exceeds what colloquially will be considered a “tip”. In such instance it is often cheaper to give the amount as gift, as the gift tax rate will likely be lower than the income tax rate.
So, obviously there are a few things to consider for Americans receiving tips in Germany – especially when those are going to exceed certain limits. Please let the taxperts know how to best approach the subject in a dual-filing environment.
