What can happen if an employee doesn’t 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 until notice and demand for the taxes is made to the employer by the IRS. 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.

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