Tip Reporting – The Saga Continues

The U.S. Supreme Court, on June 17, 2002, overturned lower court rulings in the case of Fior d’Italia vs. United States and upheld the Internal Revenue Service’s (IRS) right to assess payroll taxes on "allegedly unreported tips" using aggregate estimates.

The ruling allows the IRS to continue its practice of basing an assessment of employer FICA payroll taxes on an estimate of all tip income paid to all employees aggregated together and assessing only the employer and not the employee. The IRS can make this judgment arbitrarily by extrapolating tips included on credit card receipts. Furthermore, they do not have to show that employees did not report the tips and as there is no statute of limitations on FICA tax liability, on underreported tips, they can assess tax as far back as 1988 – the first year employers were liable for FICA tax on employee tips.

The National Restaurant Association has vowed to take the issue up with Congress and lobbying efforts have already begun.

What should you as an employer in the restaurant industry do now? Give our Restaurant Group a call (781) 453-8700 or email smartin@lknscpa.com and we’ll be happy to discuss the options with you.