Most bars, restaurants, and cafes in Germany accept either cash or card tips. For businesses and staff in the food and beverage industry, the correct handling of tips, especially for card payments, is important to ensure they remain tax-free.

This article will tell you when tips in Germany are taxable and when they’re tax-free, as well as the special rules that apply to card payments. We’ll explain the differences between voluntary tips and service charges that are automatically applied, plus the effects these have on taxation. We’ll also give you an overview of digital tip functions in card payments and how you can correctly integrate tips into payroll.

What’s in this article?

• When are tips tax-free and when are they taxable?
  
• What’s the difference between a tip and a service charge?
  
• When are tips on card payments taxed?
  
• Suggested tips and digital terminal functions
  
• Payouts and integration into payroll
  

When are tips tax-free and when are they taxable?

A tip is a voluntary payment that a third party—usually a customer or guest—gives to an employee on top of the payment owed for services rendered. In Germany, tax on tips is governed by Section 3, No. 51 of the German Income Tax Act (EStG). This section was introduced as part of the Law on Tax Exemption for Employee Tips, which came into effect on January 1, 2002.

According to Section 3, No. 51 of the EStG, tips are exempt from tax if they:

• Are granted on the basis of work performance
  
• Come from a third party, i.e., not the employer itself
  
• Are made voluntarily
  
• Are paid on top of the amount due for the service rendered
  

Employee vs. employer

A key aspect of taxation on tips is the status of the tip recipient. Tips that go straight to employees qualify as tax-exempt under the EStG because customers give them in direct recognition of an individual’s service. For example, diners at restaurants might voluntarily pay their server 5%, 10%, or 20% of their bill total as a tip for good service.

Gratuities that go directly to the employer, on the other hand, do not generally qualify as tax-free tips within the meaning of the EStG. When business owners or self-employed persons receive tips, they must remit value-added tax (VAT) on those tips in accordance with Section 10.1.1 of the German VAT Act (UStG). The business must treat these tips as income subject to VAT by documenting the tips on their books and noting them on their tax return.

What’s the difference between a tip and a service charge?

For a tip to be tax-free, it must be given voluntarily. Fixed surcharges and automatic service fees, therefore, do not qualify as tips. As a rule, restaurants add such fees to the cost of the food and drink they serve. They are a fixed component of costing. You’ll usually find information about service charges displayed on menus or invoices.

As service providers, businesses in the food and beverage industry are, in principle, entitled to include these charges in their prices. Each business owner decides for themselves whether to pass on these earnings to servers or kitchen staff, and in what form. If they do decide to pass on this money, then they either pay these funds out together with their employees’ regular salary or as an additional payment subject to payroll tax. Consequently, this is not a gratuity given directly to an individual employee by a guest.

Therefore, flat-rate service fees or automatic surcharges that are, legally speaking, nondiscretionary or based on contractual agreements do not qualify as tax-free tips under the EStG. Instead, they constitute wages or additional compensation, which is subject to tax.

When are tips on card payments taxed?

Tips create legal and administrative challenges for businesses in the food and beverage industry—especially in terms of organization, documentation, and payouts. The increasing adoption of cashless forms of payment only adds to the situation. While cash tips are given directly and personally to employees, tips for card payments are processed through the business’s point-of-sale (POS) system.

In principle, tips can be tax-exempt even if they are part of a card payment, as long as they’re voluntary and the business passes on the full amount to the relevant employees. The business can only take on a technical role as an intermediary, but it cannot benefit economically from the tips.

What makes the tax side of things particularly tricky is when tips are first paid into the establishment’s business account by card, pooled, and then paid out later according to an internal tip-sharing plan. With these kinds of setups, the risk is that the tax authorities will consider these payments to be wages subject to payroll tax, rather than direct tips. This risk only increases if the timing, amount, or recipient of the payment cannot be clearly assigned to the tipper, or if the employer has a say in how tips are distributed.

The importance of proper documentation

Considering all of the above, proper documentation is paramount. Businesses that accept tips should establish clear and transparent processes for handling tips, especially for card payments. This includes, for example, separately displaying tip amounts in the POS system, clear internal regulations for forwarding tips, and timely payment to staff. A clear separation between business revenue and tips is necessary to avoid jeopardizing the tax exemption under Section 3, No. 51 of the EStG.

Suggested tips and digital terminal functions

Cashless payments are being used with ever greater frequency in Germany and are becoming increasingly popular in the food and beverage industry. As a result, active support for tipping via modern payment terminals is becoming increasingly important. Especially with card payments, it makes sense for businesses to suggest optional tip amounts to customers during the payment process. This makes voluntary tips more transparent and easier to manage. The goal is to increase the willingness to tip without compromising the voluntary nature of tips, which is key to tax deductibility.

One digital solution that does this is Stripe Terminal. Terminal allows you to display suggested tip options on the card reader before the payment is made. The terminal can be configured to allow customers to choose from one of several predefined percentages or fixed amounts.

The tip function can also be integrated directly into your checkout flow via the Stripe PaymentIntent API. With this configuration, the card reader displays the tip options before the payment is authorized. This means that any additional amount selected by your customers is captured together with the bill total as part of the payment transaction.

In this way, Terminal improves not only the customer experience, but also the documentation of tips for card payments. Suggested tips are clearly worded and displayed separately from the bill total, making it easier to prove they’re voluntary gratuities. Terminal also gives you the ability to customize tip configurations for each location and currency via the Dashboard or the Terminal settings.

For businesses in the food and beverage industry in Germany, digital solutions like Stripe Terminal are a practical way of increasing the acceptance of cashless tips, while at the same time simplifying internal processes for paying out tips to staff.

Payouts and integration into payroll

In order to ensure that tips on card payments remain tax-free, businesses must process them correctly. In particular, it’s important that businesses merely pass on the tips and that they pay these out to their staff promptly.

Options for paying out tips

There are a number of different ways to deduct tips from card payments and pay them out to staff:

• Direct payouts to employees: The employer pays out tips to the relevant employees as soon as payment is received, without pooling them or delaying payout.

• Tip pooling and sharing plan: Businesses can first pool tips and then distribute them to staff according to a predefined, transparent plan. This requires that the division of tips is clearly documented, and that it is obvious how the tips have been divided up.

• Integration into payroll: If tips are paid out via payroll, then it must be made clear that these pay elements constitute tax-free gratuities according to Section 3, No. 51 of the EStG. These amounts must not be treated as a regular wage, otherwise the tax exemption is waived.

Compliance guidelines

The following guidelines can help businesses in Germany ensure compliance when processing tips by card payment:

• Documentation: Businesses should record all tips clearly, with a date, amount, and recipient. This is especially important for card payments.

• Separation from business revenue: Businesses must clearly separate tips from other business revenue in order to ensure that tips remain tax-free and avoid misunderstandings during tax audits.

• Transparent distribution: Internal policies should state clearly how and when tips are passed on and distributed among the staff. This ensures consistency and fairness toward employees.

• Regular review: Audits or internal controls help to ensure proper compliance with processes and maintain tax exemption.