It is true: The IRS requires employers to pay the employer's share of FICA and Medicare on employees' tips.

1. The best way to see how this works is to print out and look at Form 941.
2. Start with line 2 "Wages, tips, and other compensation." Notice "tips." The IRS instructions read: "Enter amounts on line 2 that would also be included in box 1 of your employees' Forms W-2. See the Instructions for Forms W-2 and W-3 for details."
3. The instructions for Box 1 of W-2 include the following: "Include the following: 3. Total tips reported by the employee to the employer."
4. These set of instructions begin to make it clear that the employer is supposed to report on Form 941 even the tips reported by the employee.
5. Line 5b of Form 941 makes it quite clear. "5b. Taxable social security tips. Enter all tips your employees reported to you during the quarter."
6. Line 5c makes Medicare clear: "Taxable Medicare wages and tips. Report all wages, tips, sick pay, and taxable fringe benefits that are subject to Medicare tax."
7. There is a technical reason why tips suject to FICA are reported on one line and the same tips subject to Medicare are reported on another line. It has to do with total tips and wages per employee approaching $100,000. This will not happen for the vastly great majority of tipped employees.
8. Once those tips reported by employees are entered on lines 5b and 5c, the rates of 12.4% and 2.9% are in fact the combined employee withholding plus employer's matching funds share.

COMPREHENSIVE EXAMPLE #1

1. Let's say that there is only one employee and that employee had no wages but had $1,000 of tip income.
2. He reported the $1,000 tip income to you but did not give you the money.
3. Enter $1,000 on line 2 of Form 941.
4. Enter $1,000 again on line 5b and multiply by 12.4% = $124.
5. Enter $1,000 again on line 5c and multiply by 2.9% = $ 29.
6. Work down Form 941 and eventually combine $124 and $29 and pay the total $153.
7. Since the total $153 includes both employer and employee shares of FICA and Medicare, the employer may go (is required) back to the employee and demand and receive payment of his $76.50.

COMPREHENSIVE EXAMPLE #2

1. Let's take a more common example of an employee who has $600 tips and $400 wages.
2. You have his $400 wages.
3. He does not give you his $600 tips, but simply reports the amounts to you.
4. The computation is slightly different than above, but still results in a total of $153 of which $76.50 is owed to you by the employee.
5. Deduct the whole $76.50 from the $400 even though the $76.50 covers both the $400 wages and the $600 tips.

Copyright © - 2006 Dutch Hawkins Mandeville, LA USA - All Rights Reserved

August 09, 2006