Are your tips subject to CPP and EI?

Are your tips subject to CPP and EI?

Employees who earn tips or gratuities are required to report these amounts as income earned. This type of income may be included as insurable earnings and is subject to CPP and EI.

There are two types of tips an employee may receive: controlled tips and direct tips.

Controlled tips are considered part of the employee’s total gross pay and are therefore subject to CPP and EI. Controlled tips are provided by the employer and are considered to have been paid from the employer to the employee. Common examples of controlled tips are:

  • Tips that are given to the employer and later disbursed to the employees.
  • When a tip sharing formula is used by the employer to allocate the tips to employees.

Direct tips are not considered to be under control of the employer and are paid out by the customer. This type of gratuity is not subject to CPP or EI. Common examples of direct tips are:

  • Tips left by a customer after the service is complete and the employee keeps the entire amount.
  • Tips that are shared among the employees in a method determined by the employees, with no input from the employer.

An employee may receive both types of tips, but only the controlled tips will be included in the employee’s insurable earnings.

When an employer uses a controlled tip method, they are responsible for including the amounts in their employee’s gross earnings and must make the corresponding deductions for CPP and EI.

If you are unsure of what type of tip system your company is using, or how to account for tips within insurable earnings, contact your accountant today!

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