In an IRS webinar called "Collecting Employer Taxes on Tips," Daniel Lauer and Jackie Livingston, respectively, Program Manager and a Senior Program Analyst for IRS's National Tip Compliance Program, have provided further information on the new initiative which IRS announced in May 2010 that uses data from employees' Forms 4137, Social Security and Medicare Tax on Unreported Tip Income, to determine the employer's share of FICA taxes on unreported tips.
An employer's liability for its share of the FICA taxes on unreported tips does not arise until it receives a "Section 3121(q) Notice and Demand" from IRS. A "Section 3121(q) Notice and Demand" instructs the employer to include the FICA taxes shown on the notice and demand on the employer's next Form 941, Employer's Quarterly Federal Tax Return. An employer will not be subject to any interest charges or deposit penalties if it properly reports the taxes as instructed in the notice and demand, and remits the tax due with its Form 941, or if it timely makes a deposit that is required to be made in accordance with the instructions on the notice.
Employees use Form 4137 to report and pay their share of Social Security and Medicare taxes (FICA taxes) on tips that they did not report to their employer. The form was revised in 2007 to require employees to include the employer identification number (EIN) of their employer on the form. Daniel Lauer noted that this revision was made so that IRS could identify employers who are not paying their share of FICA taxes on unreported tips. IRS recently concluded a pilot program that used data from employees' 2007 Forms 4137 to identify employers not paying their share of FICA taxes on unreported tips. Lauer said that IRS is currently refining the program to meet taxpayer expectations and to improve tip reporting compliance. IRS is requesting public comments on the program. Lauer expects employers to begin receiving unreported FICA tax notices sometime in the next six months. The notice will be for current tax periods, rather than for the 2007 tax year.
Employers will receive a Form 4520P "pre-notice" prior to receiving a notice (Form 4520) that requires them to pay the unreported FICA tax. The pre-notice will be issued well in advance of the Form 4520 notice to give employers time to review their records and contact IRS if they find any discrepancies with IRS records. The notice will include a deadline for responding, but Jackie Livingston said that employers can request an extension of the deadline. IRS will have a dedicated phone line to help resolve any discrepancies that are noted by employers on the pre-notice. Lauer said that the notices will be sent to employers in all industries that commonly have tip income, rather than only the food and beverage industry. The notices will include a mailing stuffer with 10-12 frequently asked questions from the IRS pilot program.
IRS is in the process of creating a web page that will be specifically devoted to tips.
References: For payment of FICA tax on tips, see FTC 2d/FIN ¶S-5534.2; United States Tax Reporter ¶31,114; TaxDesk ¶544,004; TG ¶9523.