Beginning this year, employers with employees who receive tips must pay Federal Insurance Contributions Act (Social Security) tax on the total amount of cash tips reported.
All cash tips subject to employee FICA tax are considered wages, making these tips subject to an employer's FICA.Previously, employers weren't required to pay FICA tax on tips unless they paid wages that were less than the federal minimum wage and wages paid were taxed. Internal Revenue Service officials said the new law eliminates the benefit an employer with tipped employees would have over an employer whose employees receive all their compensation as salaries or wages.
Each month employees report cash tips of $20 or more to employers. Employers withhold income tax and Social Security tax (or railroad retirement tax) from the combined tips and wages, up to the Social Security wage base.
Form 941, "Employers Quarterly Federal Tax Return," is used to pay the IRS the taxes collected and explains how to report the employer's portion of FICA on tips.
IRS officials said workers who receive tips can order free IRS forms to keep track of tips. IRS publication 1244 contains forms for listing daily tips and forms for reporting monthly.
Anyone who receives tips of $20 or more in one month while working for one employer is required to submit a written, signed report to his or her employer by the 10th day of the next month. All individuals who get tips must report all such income on their income tax returns.