Answer: Employers in industries where tipping is common know that they must pay the employer share of social security and Medicare taxes on tips which employees report to them. However, many employers do not realize that they may be liable for the employer share of these taxes on tips employees do not report to them. For tips which the employees did not report to the employer, the employer’s liability does not arise until the Service issues a Section 3121(q) Notice and Demand.
- You, as an employer, have a liability to withhold and pay the employee share of social security and Medicare tax on tips which your employees report to you to the extent that wages and other employee funds are available. You must also pay the employer share of social security and Medicare tax on all tips reported to you by employees.
- Employees who customarily receive tips are required to report their cash tips to their employers at least monthly, if they receive $20 or more in the month. Cash tips include tips received directly in cash or by check from customers, charged tips distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement.
- For tips which the employee does not report to you, your liability for the employer share of social security and Medicare tax does not arise until the Service issues a Section 3121(q) Notice and Demand to you. The Service may issue the notice and demand based on tip audits using estimates, including data from Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, or based on information the Service collects from employees’ Forms 4137, Social Security and Medicare Tax on Unreported Tip Income.
- Form 4137 is used by employees to report and pay their share of social security and Medicare tax due on tips they did not report to their employer. This includes any tips allocated to employees of large food and beverage establishments. Generally, employees must include the allocated tips as income on their income tax returns unless they have adequate records to show that they received less tips in the year than the allocated figures.
- If you are a large food or beverage establishment (more than 10 employees on a typical day and food or beverages consumed on the premises), you are required to allocate tips if the total tips reported to you are less than 8% of gross sales. Report the allocated amount on the employee’s Form W-2 at the end of the year.
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