The Tax Authority considers tips as employment income, meaning they are subject to income tax and companies must apply withholdings. Social Security only requires contributions in two specific cases.
According to El Español, The Tax Authority classifies tips as employment income subject to the Income Tax for Individuals (IRPF), just like salaries. This obliges companies to make the corresponding withholdings when distributing that money among their staff.
The basis for this criterion is found in Article 17 of the IRPF Law, which defines as gross employment income the compensations or benefits, monetary or in kind, that derive from personal work or the employment relationship.
“All compensations or benefits, whatever their denomination or nature, monetary or in kind, that derive, directly or indirectly, from personal work or the employment or statutory relationship.”
Article 76 of the IRPF Regulation adds that taxpayers with economic activity must practice withholdings or payments when they pay their staff the amounts received from third parties as tips or service remuneration.
On the other hand, tips are not subject to VAT, because they are voluntary contributions from the customer and do not form part of the service price.
Regarding Social Security, as a general rule, there is no contribution, since the tip is considered a direct donation from the customer to the worker without the company's involvement. There are two exceptions: when the employer collects, controls, and distributes the tip jar and includes it in the payroll, or when a collective agreement expressly requires it. Some provincial agreements in hospitality, passenger transport, or hairdressing include this obligation.
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