Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 66-75

1966-1 C.B. 231

IRS Headnote

The Internal Revenue Service answers various questions concerning the treatment and reporting of tips under the Federal Insurance Contributions Act.

Full Text

Rev. Rul. 66-75

Various questions have been presented to the Internal Revenue Service relative to the treatment and reporting of tips under the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954), as amended by section 313 of the Social Security Amendments of 1965, Public Law 89-97, C.B. 1965-2, 601. The questions presented and answers thereto follow:

Questions 1 and 2 .-Assume that during 1966 and before the end of that year an employee has received `wages' paid by his employer in the amount of $5,000 and has received cash tips (from customers of his employer) in the amount of $1,600. If the employer continues to pay additional wages to the employee in 1966, is the employer liable for the employer taxes on the additional payments to the employee over and above the $5,000 and up to the annual wage limitation of $6,600 during 1966? Is the employee liable for the employee taxes on these additional payments?

Answers to Questions 1 and 2 .-After 1965 the term `wages', as defined in the Act, includes certain tips for purposes of the employee taxes but not for purposes of the employer taxes. Under these facts the employer incurs liability for employer taxes on the first $6,600 of wages he pays to the employee in 1966, but the tips received by the employee are not subject to the employer taxes. The employee taxes apply to the first $6,600 of wages, including tips, received by the employee (that is, the first $5,000 received from the employer and the $1,600 tips). The additional payments made by the employer are not subject to employee taxes. Stated differently, tips count against the $6,600 annual limitation of wages subject to the employee taxes, but the employer's liability for employer taxes on wages continues until wages other than tips total $6,600 for the year.

Questions 3 and 4.-3 . If an employee receives $40 in cash tips directly from customers of his employer during March 1966 and reports the $40 to his employer during the first 10 days of April, should the $40 be reported by the employer in his return on Form 941, Employer's Quarterly Federal Tax Return, for the first quarter of 1966 or for the second quarter of 1966? 4 . If an employee receives $80 in tips during March 1966 and reports $50 of this amount to his employer on March 25 and reports the balance of $30 to his employer on April 9, when should the employer report these tips?

Answers to Questions 3 and 4 .-Tips reported by an employee to his employer in a written statement as required by section 6053(a) of the Internal Revenue Code of 1954 are deemed to be paid to the employee at the time the written statement is furnished to the employer. (If a written statement is not furnished, the tips are deemed to be paid at the time the tips are actually received by the employee.) Under section 6053(a) of the Code, an employee who receives cash tips amounting to $20 or more in any calendar month after 1965, in the course of his employment by an employer, must report the tips to the employer by furnishing one or more written statements not later than the 10th day following the month of receipt.

In question 3 the tips received in March and reported during the first 10 days of April should be treated as paid to the employee in April. These tips should be included in the return of the employer for the second quarter of 1966.

In question 4 the $50 reported on March 25 should be treated as if paid on that date and should be included in the return of the employer for the first quarter. The balance of $30 should be treated as if paid when reported, on April 9, and should be included in the return for the second quarter.

Question 5 .-This question relates to section 3121(a)(12)(B) of the Act, under which cash tips actually received by an employee in any calendar month in the course of his employment are not taxable wages unless the amount is $20 or more. Assume that in March 1966 an employee actually receives $31 in cash tips from his employer's customers, and that in making written reports thereof to his employer as required by section 6053(a) of the Code, the employee reports $20 on March 31 and $11 on April 5. To what amount do the employee taxes apply?

Answer to Question 5 .-Under these facts the employee taxes apply to the entire $31. The exclusion provided by section 3121(a)(12)(B) of the Act does not apply, because the amount of cash tips actually received in March was $31. Assuming that these were the only tips received by the employee in the course of his employment, the employer would report $20 in his return for the first quarter of 1966 and $11 in his return for the second quarter of 1966.