In Revenue Ruling 2012-18, the Internal Revenue Service (the “IRS”) has provided guidance, in Q & A format, to employers and employees on the FICA taxes imposed on tips.
By way of background, the Revenue Ruling says that section 3121(a) of the Internal Revenue Code (the “Code”) defines “wages”, for FICA tax purposes, as all remuneration for employment, with certain exceptions. Section 3121(a)(12)(A) excludes from the definition of wages tips paid in any medium other than cash. Section 3121(a)(12)(B) excludes cash tips received by an employee in any calendar month in the course of the employee’s employment by an employer, unless the amount of the cash tips is $20 or more in that month.
Under section 3121(q) of the Code, tips received by an employee in the course of the employee’s employment are considered remuneration for that employment and are deemed to have been paid by the employer for purposes of the payment of the employer’s share of FICA taxes. This remuneration is deemed to be paid when a written statement including the tips is furnished to the employer by the employee pursuant to Code section 6053(a) (this section expressly requires such reporting). Section 3111 of the Code generally requires the employer to pay its share of FICA tax on the amount of cash tips received by the employee. However, if the employee did not furnish the statement pursuant to section 6053(a) (or if the statement furnished was inaccurate or incomplete), then in determining the employer’s liability to pay FICA taxes on tips, section 3121(q) provides that the remuneration is deemed to be paid by the employer on the date on which notice and demand for the taxes is made to the employer by the IRS.
Under section 3121(q) of the Code, for purposes of the employee’s share of FICA taxes, tips that are properly reported to the employer pursuant to section 6053(a) are deemed to be paid by the employer at the time a written statement is furnished to the employer pursuant to section 6053(a). Unreported tips received by the employee are deemed to be paid to the employee when actually received by the employee.
The Q & As clarify the following (among other things):
–All cash tips must be reported to the employer, unless the cash tips received by the employee during a single calendar month while working for the employer total less than $20. Cash tips include tips received from customers, charged tips (e.g., credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement. Non-cash tips (i.e., tips received by an employee in any medium other than cash, such as passes, tickets, or other goods or commodities) from customers are not wages for FICA tax purposes and are not reported to the employer. All cash tips and non-cash tips are includable in an employee’s gross income and subject to federal income taxes.
— The employee must give the employer a written statement (or statements) of cash tips by the 10th day of the month after the month in which the tips are received. The statement may be furnished on paper or transmitted electronically.
–The employer withholds the employee share of FICA taxes on reported tips from the employee’s wages or from other funds made available by the employee for this purposes. The employer pays both employer and employee shares of FICA taxes in the same manner as the taxes on employees’ non-tip wages and includes the reported tips on Form W-2.
— If an employee fails to report tips to his or her employer, then the employee becomes liable for the employee’s share of FICA taxes on those unreported tips. Further, employees who fail to report tips to their employers are subject to a penalty under section 6652(b) of the Code. This penalty is equal to 50 percent of the employee’s share of FICA taxes on the unreported tips, unless the employee can provide a satisfactory explanation showing that the failure was due to reasonable cause and not due to willful neglect.
–If an employee fails to report tips to his or her employer, then the employer is not liable for the employer’s shares of FICA taxes on those unreported tips, until notice and demand for the taxes is made to the employer by the IRS. The employer is not liable to withhold and pay the employee’s share of FICA taxes on the unreported tips.