FICA TAX ON TIPS

A new program has been announced by IRS that uses data from employees' Forms 4137, Social Security and Medicare Tax on Unreported Tip Income, to determine the employer's share of FICA taxes on unreported tips.

Employees use Form 4137 to report and pay their share of Social Security and Medicare taxes (FICA taxes) on tips that they did not report to their employer.

The IRS believes that employers in industries where tipping is common know that they must pay the employer's share of FICA taxes on tips that employees report to them. However, IRS feels that many employers do not realize that they may be liable for these taxes on tips employees do not report to them.

Employers are subject to FICA tax on unreported tips. An employer's liability for its share of the FICA taxes on unreported tips does not arise until it receives a Notice and Demand from IRS which instructs the employer to include the FICA taxes shown on the notice and demand on the employer's next Form 941, Employer's Quarterly Federal Tax Return. An employer will not be subject to any interest charges or deposit penalties if it properly reports the taxes as instructed in the notice and demand, and remits the tax due with its Form 941, or if it timely makes a deposit that is required to be made in accordance with the notice instructions.

In the past, IRS issued notice and demands based on tip audits using estimates, including data from Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. Under the new initiative, the Notice and Demand will be based on information that IRS collects from employees' Forms 4137.

IRS generally intends to notify an employer at least 30 calendar days in advance of the issuance of a Notice and Demand by issuing a pre-notice. IRS has a designated staff to help resolve any discrepancies that are noted by employers on the pre-notice.

Observation: I have yet to see any of these new notices. If by chance you were unlucky enough to receive one please let me know. I am interested on how the IRS is actually handling this.