Form W-2, FICA, Medicare, Tips, Employee Benefits
Question: As an employer, do I have any liability for social security and Medicare taxes if my employees receive tips but don't report them to me?
Yes. Employers in industries where tipping is common know that they must report and pay taxes on tips employees report to them. However, many employers do not realize that they are liable for the employer share of social security and Medicare taxes on tips employees do not report to them. The employer’s liability for taxes on unreported tips does not arise until the Service issues a Section 3121(q) Notice and Demand.
- You, as an employer, must withhold and pay the employee share of social security and Medicare taxes on tips your employee reports to you to the extent the employee’s non-tip wages or funds the employee provides you are available. You must also pay the employer share of social security and Medicare taxes on all reported tips.
- Tipped employees are required to report their tips to their employers by the 10th of the following month if they receive cash tips of $20 or more in the month. Cash tips include tips they receive directly from customers, charged tips (e.g., credit and debit card charges) you distribute to them, and tips they receive from other employees under any tip-sharing arrangement. Thus, both directly and indirectly tipped employees must report tips received to their employer.
- For unreported tips, your liability for the employer share of social security and Medicare taxes does not arise until the Service issues you a Section 3121(q) Notice and Demand. The tax due shown on the notice and demand may be based on tip audits, data from Form 8027 (PDF), Employer’s Annual Information Return of Tip Income and Allocated Tips, or Forms 4137, Social Security and Medicare Tax on Unreported Tip Income. The employer is not liable to withhold and pay the employee share of social security and Medicare taxes on unreported tips.
- You must file Form 8027 if you operate a large food or beverage establishment. A large food or beverage establishment is an operation that provides food or beverages for consumption on the premises and has employees who customarily receive tips. Additionally, the employer must normally have more than 10 employees who worked more than 80 hours on a typical business day during the previous year. If you are the employer at a food or beverage operation, see the Instructions for Form 8027 (PDF), Employer's Annual Information Return of Tip Income and Allocated Tips, to determine if you must file this form. You may also be required to allocate tips if the total tips reported to you are less than 8% of gross receipts. Report the allocated amount on the employee’s Form W-2, Wage and Tax Statement.
- Form 4137 is used by employees to report and pay their share of social security and Medicare taxes on tips they did not report to you. This should include any tips allocated to employees of large food or beverage establishments. Unless an employee has a daily tip record or other credible evidence that shows that the employee did not receive the allocated tips shown on Form W-2, the employee must report the allocated tip amount on Form 4137.
- Publication 15 (PDF), (Circular E), Employer's Tax Guide
- Reporting Tip Income - The Jill and Jason Show
- Tax Topic 761, Tips - Withholding & Reporting
- Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer
- Publication 531, Reporting Tip Income
- Revenue Ruling 2012-18, 2012-26 I.R.B. 1032
Category: Small Business, Self-Employed, Other Business
Subcategory: Form W-2, FICA, Medicare, Tips, Employee Benefits