The introduction of the Payment of Wages (Amendment) (Tips & Gratuities) Act 2022 is intended to bring clarity to the definition and treatment of tips, gratuities, and service charges. In particular, how these relate to employee pay.
It came into effect on 1st December 2022. The introduction has more of an impact on some industries than others; hospitality, taxi services, hairdressing, and beauty to name just a few.
Full details of the Act can be found in the WRC guidance document here.
How do tips and gratuities impact payroll?
Up until 1st December 2022, the treatment of tips and gratuities was not clear regarding its relationship to employee pay. In some cases, organisations used these payments to make up contractual pay arrangements, in other words, they were used to make up the basic pay for employees.
With the introduction of the changes, these payments have now been distinguished from ‘normal pay’. They can no longer be used to make up contractual pay, they are separate/additional earnings (emolument) for taxation purposes.
Due to this, there is a possible knock-on effect. Organisations may prefer to distribute these tips/gratuities through the payroll system rather than in either cash or one-off bank transfers. It is important to note that businesses are not obliged to distribute tips this way.
Taxation has not changed in relation to these payments; they are subject to Income Tax under Schedule E of the Taxes Consolidation Act (TCA) 1997. The difference is, if included through payroll this is charged at source through the PAYE system rather than the employee making a declaration of the additional income at the end of the tax period.
So in plain language employer and employee PRSI apply if tips are gratuities are paid via payroll.
What else do I need to know?
If tips are distributed as cash or employees take them directly without employer involvement, the business has no responsibility for the treatment of these tips and the tax implications.
Cash tips are still not regulated under the Act as employers have no control over these.
Businesses are obliged to display information to consumers on the treatment of tips.
Employees are legally entitled the receive tips in electronic form e.g. debit/credit card, contactless, forms other than cash.