Payroll News

The IRS Chief Council has ruled in a case involving the FICA Tip Credit involving tips undeclared in a previous tax year.

From the ruling:

“In a prior tax year an employee receives cash tips which constitute wages but the employee fails to report the tip amounts to his or her employer in the year the tips were received. Thereafter, the employee’s employer receives in the current tax year a notice and demand for the employer share of FICA taxes with respect to the tip amounts the employee received in the prior year. The employee’s employer seeks a current year credit under section 45B for the amount of FICA tax.”

The common sense ruling asserts that the employer can’t pay the taxes or take the FICA Credit until they are made aware of the undeclared tips.

They conclude that they “find no basis for concluding that the excess social security tax amounts arise in the year in which the tips are actually received by the employee. Thus, the Code section 45B credit is available to the employer in the year of notice and demand not the year in which the unreported tips were received by the employee. ”

NOTE : Even though the employer’s liability and credit is given in the current year, the wage base and tip credit still needs to be computed based on the year that the tips were actually earned.

Filed under: Federal News, Payroll News