What is the restaurant owner's responsibility in paying FICA tax on tip income?

What is the restaurant owner's responsibility in paying FICA tax on tip income?

Suppose the bill is $1000 and tip is cash and is $100, and the employee/waiter keeps all of the tip in their pocket. And the employee's base salary is $10/hour, and the employee works 8 hours for a total base salary of $80.

Does the employer withhold 7.65% from $180, or $13.77, from the employee's base salary? So the employee receives $80 - $13.77 $66.23, minus federal and state and city income taxes. Their W-2 shows wages as $180. And the employer matches this $13.77 from their own funds (i.e. from the $1000 in revenues)?

Or does the employer withhold 7.65% of the base salary of $80, plus

15.3% of the employee's tips of $100? Thus the FICA tax withheld is (0.0765*80)+(0.153*100)!.42. The employee receives $80 - $21.42 $58.58, minus the various income taxes. The employer only matches 7.65% of the base salary of $80, or $6.12.

The second way makes sense to me because the employer does not see any of the tips, but my friend thinks it's the first way.

Now suppose the tippers are generous and the tip is $1420. 7.65% of the net salary of $1500 is $114.75, which is way more than the base salary of $80. In this case will the employer will withhold the entire $80 as FICA taxes? What about the additional $114.75 - $80 $34.75 of additional FICA tax that needs to be paid. I heard that waiters ought to give the employer enough of their tip money so that the employer can pay the FICA, federal, state, and city taxes. But what if the employee doesn't do this?

Now suppose the tippers are super generous and the tip is $100000.

7.65% of the this is $7,650 -- which is more than the employer's revenues of $1000. How can the employer possibly pay their portion of the 7.65% of the employee's tips?

And what's up with the form 8846? It looks like the employer pays their portion of FICA tax, but they get it all back as a tax credit at the end of the year -- sort of a wash.

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Good question. Off the cuff, I'd say neither way. Compare to scenario where employees do not report any tips to employer, only the IRS. They only pay 7.65% FICA, and employer pays nothing. There is no disincentive for reporting tips to employer, so the result *with* reporting should amount to the same thing as *without* reporting (total of 7.65% paid solely by employee).

But that's without looking anything up... ;-)

BTW, the following from the IRS related to this topic:

"The Internal Revenue Service today extended for an additional two years its program that simplifies the recordkeeping burden for reporting tip income in the food and beverage industry.

The Attributed Tip Income Program (ATIP) was first announced in 2006 in Revenue Procedure 2006-30. The program, which was originally set to expire Dec. 31, 2009, has been extended to Dec. 31, 2011, under Revenue Procedure 2009-53 issued today.

Employers who participate in ATIP report the tip income of employees based on a formula that uses a percentage of gross receipts, which are generally allocated among employees based on the practices of the restaurant.

Both employees and employers benefit from participation in the ATIP program. The IRS will not initiate a tip examination during the period the employer and employee participate in ATIP. Participating employees do not have to keep a daily tip log or other tip records.

Enrollment is simple. Employers elect participation in ATIP by checking the designated box on Form 8027, Employer?s Annual Information Return of Tip Income and Allocated Tips. Employees who work for a participating employer can easily elect to participate in ATIP by signing an agreement with their employer to have their tip income computed under the program and reported as wages. "

That's just it -- there is no employer's portion of FICA on tip income.

That would fit with my explanation above, but I'm not an expert on this particular form.

-Mark Bole

Reply to
Mark Bole

Not the right way. Where did you get the $180?

Not the right way.

Snip

In your example, the employer withholds from $1,000 reported tip plus $80 in wages for total of $1,080. But 7.65% is more than $80 so the employer withholds the entire $80 and shortage shows up on the W-2.

Drew Edmundson, CPA Cary, NC

Reply to
Drew Edmundson

$80 wage plus $100 tip.

The tip was only $100, not $1K. I think the example would be easier to follow in tabular format.

Pub. 15 (section 6) indicates the employer *does* pay employer share of FICA on tips, but as the OP pointed out, Form 8846 also seems to give back a credit for that, to the extent tip income was not used to meet minimum wage requirements. The ordering rules for withholding are also detailed in this section, which should answer the other details of the OP's question.

Allocated tips (W-2 box 8) do not result in employer share of FICA being paid.

In the end, if the employer had to take a 7.65% hit on employee-reported tips, and nothing if employees didn't report tips, it's hard to believe any employer would willingly deal with reported tips.

-Mark Bole

Reply to
Mark Bole

from IRS web site at

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where it talks about Employment Tax on Tip Income.

it looks like there is a set of levels of rule. not just one. there are two forms talked about there: form 4137 and form 8027.

from the overview " Tips are considered wages for purposes of the Federal Insurance Contributions Act (FICA) taxes and federal income tax withholding for cash tips of $20.00 or more. Tips are also subject to various reporting requirements by both the employee and the employer. All tip activity, regardless of operating division, should be coordinated through the SB/SE, Headquarters Compliance Policy Office. This office has responsibility for oversight and policy decisions regarding the tip program."

and then there is this later in the text. in the Introduction.

"

The employer is required to collect employee tax only on tips that are reported by the employee to the employer. If the amount of employee tax on tips exceeds the wages under the control of the employer, the employee may furnish to the employer money equal to the amount of such excess. #

If the employee does not provide enough money, the employer will apply the employee's reqular pay and any money the employee gives to the employer to the taxes in the following order:

  1. all taxes on the employee's pay; 2.

social security and Medicare taxes or railroad retirement taxes on the employee's reported tips; and 3.

federal, state, and local income taxes on the employee's reported tips.

Any taxes that remain unpaid can be collected by the employer from the employee's next paycheck. If withholding taxes remain uncollected at the end of the year, the employee may be subject to a penalty for under payment of estimated taxes. " as to point do you have to withhold tips for FICA there is this

4.23.7.3.1 (03-01-2003) Tip Compliance Agreements
  1. The purpose of the Tip Compliance Agreements is to help business employers in industries where tipping is customary understand their tip income reporting responsibilities, and get their tipped employees to accurately report their tip income. Business employers can voluntarily choose to participate in the TRAC or TRDA agreement or institute a program of their own to improve tip reporting compliance. 2.

These Tip Compliance Agreements help reduce taxpayer burden ordinarily associated when the Service assesses additional FICA taxes on unreported tip income. The Service, through outreach and education, helps business owners and their tipped employees understand the tax laws related to tip income reporting so that they can more accurately meet their reporting and filing obligations. 3.

Some employers will find one arrangement more beneficial, some will prefer the other arrangement, and some will choose not to participate in the program at all. As this is a voluntary program, employers do not have to participate. Those who choose to participate may participate in only one arrangement at a time. 4.

The Service agrees that while under a TRDA or TRAC Agreement, prior periods will not be examined, provided that both employer and employee are in compliance with the agreement. This procedure will not apply to those tax periods where examinations are already in process prior to entering into the agreement.

" and there's this later

"4.23.7.9 (03-01-2003) Employee Tip Reporting

  1. IRC section 6053(a) requires that if any employee receives .00 or more in cash tips in a calendar month, the employee must report such tip income to the employer by the 10th day of the following month. No particular form must be used in reporting tip income."

I run a cafe and we have to deal with this. we like this part of the rules "The cash tips to which this provision applies include checks and any other monetary medium of exchange. Tips received by an employee in any medium other than cash, such as passes, tickets, or other goods or commodities do not constitute wages for FICA purposes (Treas. Reg. section 31.3121(a)(12)?1). "

Note that under one of the forms "Form 4137, Social Security and Medicare Tax on Unreported Tip Income, is used by an employee to compute the social security and Medicare tax owed on tips not reported to the employer, including any allocated tips shown on the employee's Form(s) W?2 (unless the employee can prove a smaller amount with adequate records). The employee may be subject to a penalty equal to

50 percent of the FICA tax due for failure to report the cash tips to the employer unless reasonable cause exists (IRC section 6652(b)). The Form 4137 is filed with the Form 1040."

if you do not report tip as a worker to you boss you report it under the rules to the IRS.

I
Reply to
wuffa

Sorry, missed that.

The OP wasn't talking about allocated tips but reported tips.

Not sure I understand this comment. The restaurant is still getting a good deal, the customer is paying the wait staff and the restaurant has to make sure the wait staff gets paid minimum wage. Besides, most reported tips are on credit card slips. Not much way to pretend the employer doesn't know about them.

Drew Edmundson, CPA Cary, NC

Reply to
Drew Edmundson

It seems like the answers have all gotten way off from the original question, which was based on the assumption that for tips, like wages, both the employer and employee each pay their half (7.65%, or 15.3% combined) of FICA.

I'm claiming that when all is said and done, only the employee pays

7.65% on tip income, the employer does not end up paying anything, due to the credit that is allowed. The point of my comment above was, how could the IRS possibly motivate anyone to participate in voluntary tip reporting if it cost 7.65% more compared to not participating?

I'm leaving out all the details about less than $20/month, wage less than minimum, and the ordering rules for withholding as described in Part 6 of Pub 15. It's up to the OP to tell us if some or all of us have misunderstood his question. I think I understood it, and claim the question was based on a misunderstanding of the employer's payroll tax share on tip income (7.65% vs. 0%).

-Mark Bole

Reply to
Mark Bole

The credit doesn't cover all the employer tax. Tips up to the minimum wage are not eligible for the credit. I don't see why restaurants get such a credit and the rest of us don't.

Voluntary programs entered into with IRS protect the employer in the event of an audit.

Drew Edmundson, CPA Cary, NC

Reply to
Drew Edmundson

So if you have an employee who delivers documents to your clients, and the clients give the employee a tip, you pay employment taxes on that tip?

Reply to
Stuart A. Bronstein

the tip credit form 8846 even if they are participating in one of the IRS tip programs. Participating in the programs just helps the IRS police them better, with the benefit that they do not have to fear an audit. See

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where theIRS looked at the restaurant's total receipts, the tip rate for creditcard sales, and guessed that the tip rate for cash sales should be thesame (which the Supreme Court upheld), and thus concluded thatemployees underreported tips. They held the restaurant liable fortheir portion of FICA taxes, which I imagine the restaurant could getback through the tip credit -- though I'm not sure if this creditexisted in 1991 to 1992. I don't think it's right to assume that cashpaying customers tip at the same rate -- at least I tip less whenpaying cash, because I have very little cash on me at all times.

Yeah, it's about precisely whether the employer tax is 7.65% or 0%. And it's also about whether the employee tax is 7.65% or 15.3%.

Also, the employer doesn't get all 7.65% back. If they have a net loss, the credit is carried back one year, and forward 20 years. Due to the recent stimulus act law, the carryback period might be extended to 3 or 5 years, but I'm not sure about that. It's odd in this time of bailout of struggling companies that struggling companies should get no credit, but successful companies should.

Now think about this. If I start my own Schedule C business serving food, and I'm the chef, waiter, and janitor and I receive tips, then those tips would be Schedule C income. As such they would be taxed at the full 15.3%. But if I set my company up as a corporation of one person, then I can get an effectively 7.65% rate (due to the credit of

7.65%).

The federal minimum wage is $7.25. For tipped employees the federal minimum wage is $2.13 -- the difference of $5.12 is also known as the tip credit. However, some states like CA do not allow a tip credit, so employees must be paid the state minimum wage of $8.00. Thus all of the employees tips would qualify for the tip credit. See

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some fun details on the minimum wage :).

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It seems to be so. The instructions for form 8846 say that the tip credit (or refund of part or all of the employer's share of FICA taxes) applies to employees who deliver food. So if your employee delivers donuts along with the documents, form 8846 should apply.

File Form 8846 if you meet both of the following conditions.

  1. You had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption if tipping of employees for delivering or serving food or beverages is customary.
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