IRS Releases Guidance on Tip Withholding

The Internal Revenue Service released a questions and answers document (Rev. Rule 2012-18) that provides guidance on how taxes are imposed on tips under the Federal Insurance Contributions Act (FICA).

The guidance includes an explanation of employer and employee obligations. It is the employer’s obligation to withhold “the employee share of FICA taxes on the reported tips from the wages of the employee (other than tips) or from other funds made available by the employee for this purpose.”

The guidance also includes information on:

• The difference between a tip and a service charge for FICA purposes
• What tips must be reported to an employer
• How tips are reported by the employee to the employer
• Liability for unreported tips

The guidance was published on June 25, 2012.

Author: Gail Cecchettini Whaley

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