Tips on Tip Reporting: Are You at Risk for Back FICA Taxes?

If you've been in the restaurant business, at least since 2002, you've likely felt the aftershock of United States v. Fior d'Italia, even if you haven't read or fully understand this landmark Supreme Court case.

In June 2002, the Supreme Court determined that Fior d' Italia, a San Francisco restaurant, was liable to the Internal Revenue Service (IRS) in the amount of $23,262. The amount represented unpaid Federal Insurance Contribution Act (FICA) tax on tip income that was unreported by the restaurant's staff.

You are responsible for your share of FICA tax on all tip income of your employees, including any tip income that your employees don't report to the IRS. If you own or manage a restaurant, you need to make sure that your employees are reporting all of their tip income.

Otherwise -- at least for now -- the IRS has an easy way to determine any reporting shortfalls, and your share of the tax on that income will come out of the restaurant's till -- with the blessings of the highest court in the land.

In this article, we'll look at the basic accounting, legal, and practical issues of tip reporting, and point you in the direction of some resources and tips that will help you monitor your employee's tip income, so that you do not get burned in an IRS audit.