Tax Rules for Tip Jars

Are the cash amounts distributed to individuals from tip jars classified as tips under the Tax Code and subject to FICA tax? The tax rules for tip jars are complex. The April 2018 IRS memorandum states the cash amounts distributed to individuals from tip jars are properly classified as tips under the rules in a 2012 revenue procedure and are therefore wages subject to FICA taxes. This cash is also subject to the notice and demand procedures.

Tips received by employees during the course of their employment are considered payment made for services. These tips are then assumed to have been paid by the employer and are subject to FICA taxes. The timing of employer’s FICA tax liability is deemed to be paid when a written statement furnished by the employee to the employer is received. If a statement has not been received by the employer or is incomplete, the date money paid for services (the tips), as it pertains to an employer’s FICA tax liability, will be the date an IRS notice and demand for taxes is issued. 

The total amount of tips should be included on the employee’s wage payments. Income taxes and FICA taxes on tip income should be withheld from the employee’s paycheck. The employer’s share of FICA taxes should also be paid on tip income. Tip income is subject to both the maximum social security limit and the additional Medicare tax, and all tip income is subject to Federal income taxes.

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