IRS TO LAUNCH COMPLIANCE INITIATIVE AIMED AT EMPLOYER REPORTING OF EMPLOYMENT TAXES ON UNREPORTED TIP INCOME

The IRS is initiating a new compliance program geared towards employers who may have failed to report their share of employment taxes on unreported employee tips. In an unprecedented ruling from the IRS, Form 4137: Social Security and Medicare Tax on Unreported Tip Income will now be closely reviewed by the IRS to ascertain what Social Security, Medicare, and FICA taxes should have been paid by the employer on unreported tips in excess of $20.00.

According to IRS representative John Tuzynski, in remarks made at the American Payroll Association’s (APA) 2010 Capitol Summit in Washington, D.C. on March 12, the IRS “has never looked to see if employers are paying their share of” these taxes on tip income that the employee has reported on Form 4137 to their employers. The employers will be sent a Code Sec. 3121(q) notice and demand for taxes owed. If employers cooperate with the program, no penalties or interest will be assessed on the amounts owed. The employer will also have the right to challenge the IRS evaluation, Mr. Tuzynski added.

Form 4137 is used to compute an employee’s liability for Medicare and Social Security taxes on monthly tips in excess of $20.00 that were not reported to the employer or on tips allocated by a large food and beverage establishment.

A news release will be issued in the coming weeks from the IRS to inform those who are not aware of the program and answer frequently asked questions about the initiative.