What can happen if an employee doesn’t report tips?

Report tips: When employees do not report some of their tips to their employer, the employer is not liable for the employer share of social security and Medicare taxes on the unreported tips. That is until the IRS sends a notice to the employer with demand for the taxes. The employer is not liable to withhold and pay the employee share of social security and Medicare taxes on the unreported tips.

For more information on the Section 3121(q) Notice and Demand, see Revenue Ruling 2012-18, which sets forth guidance on social security and Medicare taxes on tips.