Vision Payroll

July 28, 2009

IRS Rules Distributions from Tip Jars Are Tips, Not Wages

In the recently released Chief Counsel Advice (CCA) 200929004, the Internal Revenue Service ruled that money distributed from a company’s tip jar should be considered tips, not wages.

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.

June 23, 2009

IRS Rules Discounts Offered to Employees Are Taxable Income

In the recently released Chief Counsel Advice (CCA) 200923029, the Internal Revenue Service ruled that discounts provided to an employer’s employees who purchase or lease property from a company that formerly owned the employer are taxable as fringe benefits based on the amount of the discount. Such discounts are also taxable for FICA purposes. FICA is also known as OASDI or social security and Medicare.

Qualified employee discounts are excludible from income under §132 of the Internal Revenue Code of 1986 (IRC). Since “the discounted property was not offered for sale to customers by the same employer for which the employees receiving the discount performed the services”, the discounts were not “qualified employee discounts” under IRC §132. These amounts are to be reported on Form W-2, even for former employees. They should not be reported on Form 1099.

Since the discount was offered as a percentage off the retail price, the discount may be valued for fringe benefits purposes at the amount of the discount.

Contact Vision Payroll if you have any questions on taxation of fringe benefits.

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