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IRS guidance to employers concerning applying FICA to tip income, distributed service charges

June 20, 2012 | No. 2012-300


The IRS today issued advance releases of the following guidance concerning taxes imposed with respect to tip income and service charges under the Federal Insurance Contributions Act (FICA).

The releases—Rev. Rul. 2012-18 and Announcement 2012-25—include information for employers and employees, and specifically address distributed service changes that are to be characterized as wages, and not tips.

Rev. Rul. 2012-18

Rev. Rul. 2012-18 provides, in question and answer (Q&A) format, information that the IRS intends will clarify and update the guidelines provided by Rev. Rul. 95-7.

Q&A1 of Rev. Rul. 2012-18 states that:

  • An employer’s characterization of a payment as a “tip” is not determinative for FICA purposes.
  • Absent certain factors, a payment may be a “service change.”
  • To the extent that any portion of a service charge paid by a customer is distributed to an employee, that amount is wages for FICA purposes.

Other Q&As provide guidance as to how an employer is to report tip income for FICA purposes, how an employer is to report FICA liability after an IRS notice and demand is made, and what are the collection procedures.

Announcement 2012-25

Announcement 2012-25 provides interim guidance to IRS examiners, stating that in limited circumstances, an examiner is to apply Q&A1 of Rev. Rul. 2012-18 prospectively, to amounts paid on or after January 31, 2013. This relief is intended to allow businesses not currently in compliance with the FICA rules, additional time to amend their business practices and make needed system changes.

The IRS has requested comments concerning this interim guidance and whether employers need additional time to bring their systems into compliance. Comments are due September 24, 2012.

The IRS also stated that it will be requesting comments on proposed changes to the existing voluntary tip compliance agreements program.

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ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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