U.S. Supreme Court Allows IRS to Use Aggregate Method to Determine FICA Tax Liability on Tip Income 

As a result of a recent United States Supreme Court case, many employers who include income from tips in their FICA tax calculation may be significantly understating their FICA tax liability.

The United States Supreme Court allowed the IRS to use the aggregate method of estimating tips for the purpose of calculating an employer's Federal Insurance Contribution Act (FICA) tax liability.  The IRS makes the following calculations and assumptions to determine the aggregate amount of tips that should have been reported:

• Examine the tips reported, including amounts reported on credit card receipts;
• Find the average percentage tip paid by those customers;
• Assume that cash paying customers paid at the same rate;
• Calculate total tips by multiplying the tip rate percentage by the total receipts; and

If your business is involved in an industry where customers commonly pay tips to your employees we can review your FICA tax calculations to ensure that your FICA liability for tips is being determined using the correct methodology.

Please contact our office at your earliest convenience to schedule an appointment.