The company requires that all its retail locations maintain a tip jar to collect cash to be distributed to certain employees. A non-management employee distributes the tip money according to a time sheet showing hours worked by eligible employees. Management employees are not eligible to share in the tips.
The company estimates an hourly amount that each employee earns and reports that amount times the number of hours worked as wages on Form W-2. The employer also instructs employees to report any amount received above this estimate as income.
Although under §3121(q) of the Internal Revenue Code of 1986 (IRC), tips are considered remuneration for FICA tax purposes (also known as OASDI or social security and Medicare), the remuneration is not deemed paid until the employee furnishes the employer with a written statement detailing the amount of tips received (see IRC §6053(a)). This notification is not supplied by the employees in this case. Since the procedures used by the company do not have the same level of control as described in Revenue Ruling 95-7, Q & A 2, the company is not liable for the employer share of FICA tax until the IRS makes a notice and demand for such taxes.
Contact Vision Payroll if you have any questions on taxation of distributions from tip jars.