We have a slew of clients who have a tip jar.  (Yes, these are coffee shops, by and large.)  And, our practice has been to count the funds in the tip jar every hour, and divide those funds among each person working that hour equally.   We then add those funds to the gross amounts which are subject to income and FICA taxes (and subtract the tips distributed as “cash advance”).

While the staff members don’t like it (who likes being told they have to pay taxes), we have relied on the IRS revenue procedure that tips are wages to subject to FICA.  (This procedure dates back about 6 years.)

The IRS has just (4 December 2017 ) extended this definition with a new policy about reported (and unreported) tip income.  Except- and you are going to LOVE this- it is not acceptable to use it or cite it as precedent.   (This kind of reminds me of the movie Animal House with its “double secret probation”.)

Why can’t this be used as precedent?  Because this new case is pretty special.   (I would venture to say it covers an illegal practice, and you will see this as we progress.)

It seems that John Doe (yes, that’s a pseudonym) hired (the IRS used the term “engaged”- I just didn’t see the ring) folks to work on his premises.  John claimed they were “volunteers”;  not paying them one red cent.  But, customers (yes, customers) had the option to leave a tip- or none, at all.  There was no suggested percentage or value.

At the end of each shift, the cash was distributed to those “volunteering”.  John Doe kept no records of how much cash was received or how much was distributed.   Of course, John Doe issued no W-2’s to anyone, nor did John file a 941 (quarterly account of wages and taxes) or even an annual 944 (the equivalent of a 941 for those employers who don’t pay significant wages over the course of a year).

Not surprisingly, the IRS said John Doe was directly in charge of his “volunteers”.  And, they were, therefore, employees for the purposes of Social Security and Medicare taxes.

And, that meant John Doe now owed a significant amount for FICA taxes.

Moreover, it means that tips received during the course of one’s employment (or presence on the premises, if you think you can get away with this “volunteer” BS) are remuneration.  And, subject to taxation under Section 3121(q) of the Tax Code.