The Internal Revenue Service has issued new guidance (Rev. Rul. 2012-18) that provides answers to a number of questions about how taxes are imposed on employee tips under the Federal Insurance contributions Act (FICA). The document begins with a detailed explanation of both an employer’s and employee’s FICA tax obligations as they apply to tips, clarifies how tips are to be reported to the employer and to the agency, and discusses the consequences for unreported amounts. The guidance also differentiates between what constitutes a tip and a service charge for tax purposes, explains when the section 45B employer tip credit should be applied, and sets forth a series of Q&As for employees and employers. The document is designed to modify and supersede prior guidance (Rev. Rul. 95-7) issued on this topic.
The guidance reiterates that the employer is responsible for withholding the employee share of FICA taxes “on the reported tips from the wages (other than tips) of the employee or from other funds made available by the employee.” Moreover, the employer pays both employer and employee shares of FICA taxes “in the same manner as the taxes on the employee’s non-tip wages.” The guidance includes a set of eight questions devoted to an employer’s responsibility to report and pay taxes on tip amounts. Information gleaned from these Q&As include the following:
- The employer is not liable for the employer share of FICA taxes on the unreported tips until an IRS Section 3121(q) Notice and Demand for the taxes is made, nor is the employer liable to withhold and pay the employee share of FICA taxes on the unreported tips.
- Once the IRS determines that an employer’s employees have unreported tips and issues to the employer a Notice and Demand, the period of limitations for the IRS to assess the employer share of FICA taxes is generally 3 years after the due date of the return or the date the return was filed, whichever is later. The guidance sets forth certain qualifications for this time frame.
- After such a Notice and Demand for unreported tips is made by the agency, the employer must report the amount of FICA tax liability as a current period liability for FICA taxes on the employer’s Form 941 for the calendar quarter in which the Notice and Demand is made.
- An employer is not liable for interest on the employer’s FICA tax liability for unreported tips, so long as the employer pays the tax on or before the due date of the Form 941 for the quarter during which Notice and Demand is made.
- An employer is required to deposit FICA taxes due on the unreported tips shown on the Notice and Demand.
The guidance was published Internal Revenue Bulletin: 2012-26, published on June 25, 2012.