March 2007

By G.J. Stillson MacDonnell and William Hays Weissman

Employers that have a lot of tipped employees often face a host of employment law challenges, including payroll. Under the Internal Revenue Code (“Code”), tips are income subject to income tax withholding and usually subject to Social Security and Medicare taxes as well. Problems often arise when the employer does not know exactly how much tip income an employee receives, either because they are in cash, or because the employees, such as hosts or busers, are indirectly tipped by other employees, such as waiters. This article offers employers a short guide for dealing with the federal taxation of tipped employees and the IRS’ compliance programs.

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