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Based on the recent Supreme Court ruling with the IRS, the courts have sanctioned the government forcing small business into a different role with tip reporting and compliance.  While none of the rules have changed, the IRS can now use an aggregate estimate method to calculate underreported tips and assess only the employer taxes.  This will force employers into further policing of employee tip reporting.

The US Supreme Court has ruled that the IRS can use aggregate tip estimates to ensure that the employer is paying enough FICA taxes on allegedly unreported tips.  This means that the IRS can take a look at a restaurant’s records, estimate the total amount of tips that the IRS thinks the employees should have reported and then assess the business for the employer portion of the FICA taxes.  Essentially, the courts have ruled that the IRS can assess back taxes and penalties without enforcing the same audit and review to the employee.  

Like any institution, the IRS has limited resources.  The IRS does not have the resources to audit every individually tipped employee.  The IRS is faced with the same problem as many tipped service industries: locating someone who is quite often in a lifestyle transition.  What this means is that it is easier from the IRS to find the restaurant foodservice business than it is to find the individual employee. 

“The impact of the ruling is enormous,” says Peter Kilgore, senior vice president and general council for the National Restaurant Association.  The National Restaurant Association legal experts have said that the ruling has grave implications for restaurant business that employ tipped workers.  An IRS tip-tax assessment can be devastating to a small business, since the IRS can go back as far as 1988 to assess the back taxes. 

The IRS developed a tip education and reporting requirement program, TRAC, for restaurants to use to comply with IRS requirements.  In conjunction with the IRS, the National Restaurant Association developed an alternative program know as EmTRAC.  These programs include tip education and reporting for employees, complies with tax reporting, filing and payments requirements and requires maintaining certain employment records.