The IRS has clarified and updated guidelines (Rev. Rul. 2012-18) first presented in 1995 (Rev. Rul. 95-7) concerning FICA taxes imposed on tips and the notice and demand rules under Section 3121(q).
In general, tips received by an employee are subject to payroll taxes under the Federal Insurance Contributions Act (FICA) and are deemed to be paid to the employee on the date the employee reports the tips to the employer. Employees who receive more than $20 in tips per calendar month are required to report the tips to the employer.
The revenue ruling points out that the employee is responsible for FICA taxes on unreported tips and the employee may be subject to a penalty equal to 50 percent of the employee's share of FICA taxes on the unreported tips. The employer is not liable for the employer's share of FICA taxes on unreported tips until notice and demand for the taxes is made to the employer by the IRS. Rev. Rul. 2012-18 also addresses many other issues concerning FICA tax on reported and unreported tips.
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