The following article explains how to handle tips from a VAT, income tax, and accounting perspective. While the article is based on professional publications, it is intended as a guide only — we do not guarantee its currency, and it is always advisable to refer to the applicable accounting and tax legislation.

We will look at tips from several angles:

1) Tips in relation to VAT

2) Tips in relation to income tax and their accounting

3) Tips in relation to EET (Electronic Sales Registration)

For VAT purposes, it does not matter whether a tip is paid in cash or by card, or whether it is distributed among employees. However, from an accounting and tax perspective, two situations are distinguished:

1) A tip does not enter the tax base of the received value when it has not been agreed upon in any way (e.g., in a restaurant a guest may leave a tip, but will receive the same service even if no tip is given).

2) A tip enters the tax base of the received value when it has been agreed upon in advance — for example, for setting up tables at a banquet — and will also be stated on the invoice to the customer (it may also be listed in the menu as part of the price).

Although tips are still a subject of debate — since even the customer does not always know to whom the tip will be directed — they are subject to income tax.

From an accounting standpoint, the Czech Financial Administration classifies tips as a gift provided in connection with income from business activities or income from dependent activity (employment). This means that a tip must be taxed either by the business owner as business income, or by the employee as part of their monthly payroll settlement.

It should be noted that tips are not regulated by any specific legislation in the Czech Republic. If the tip goes to the employee, the tip amount is added to their gross wage. If the employer retains the tip, it becomes part of their revenue, on which tax must naturally also be paid.

From the employer's perspective, tips represent a deductible payroll cost. To illustrate with an example:

An employee earned CZK 10,000 in tips during the month. From this, CZK 1,500 is paid in tax (tax credits are not considered here). Social and health insurance contributions amount to CZK 1,100. The employee is therefore left with CZK 7,400 from the tips.

From the employer's perspective, this represents a deductible payroll cost of CZK 13,380.

From the above, it is clear that when a tip is allocated to an employee, you should enter the amount in the Employees – Payroll Update menu. This can be done, for example, on the Bonuses tab by clicking the New button, selecting Monthly Bonus, checking the custom amount option, and clicking Save. After that, you must also click Recalculate Payroll.

This way, the tip will be included in the tax base as well as in the health and social insurance calculation:

The second option — for example, if the tip has already been paid out to the employee in cash — is to apply tax only to the tip amount within the payroll. This can also be done in the Payroll Update menu: on the Basic Wage tab, click the New button and select In-Kind Wage:

Again, check "Custom Amount Change" and save, then recalculate the payroll. The pay slip will then appear as follows:

In this case, the tip will be included in the tax base, gross wage, and insurance calculations, but will not be included in the net pay-out amount.

For EET purposes, a tip must be recorded when it is retained by the owner. It does not need to be recorded when the employee is entitled to it, as it is then included in their gross wage.