Assessment Illegal Without Determining Unreported Tips

A U.S. District Court recently ruled the IRS could not assess FICA taxes against an employer for its share of FICA taxes allegedly due on tips not reported by employees without determining that the employees’ reports of tip income were inaccurate. The employer received and recorded tip reports from its employees and then withheld and paid to the IRS employee taxes and the employer share of FICA taxes based on the amount reported by the employee. The employer had stressed to its employees the importance of reporting all tips.

Why This Is Important . . . The decision marks a victory for employers in the service industries in that the IRS can not assess FICA taxes against employers allegedly due on employee tips without first determining that the employees failed to accurately report their tips.

Employer Only Assessment Of FICA On Tips Illegal

In a second victory for service employers, the Court of Claims has ruled in a test case that the IRS' practice of assessing employers for their share of FICA on "unreported" tip income without assessing employees is illegal. The court ruled that the IRS was required to assess both the employer and each employee and then credit the employee's FICA account for the income. Assessing only the employer without crediting the employee's wage account amounted to an illegal windfall for the IRS.

Why This Is Important . . . The decision removes the incentive for the IRS to assess FICA taxes on employers. In order to do so, they will have to assess each individual employee as well and then credit their accounts for the wages - a costly and time consuming proposition the IRS has been avoiding.

IRS Settlement Program For Worker Classification Disputes

The IRS has a Classification Settlement Program (CSP) which gives an employer, that erroneously treated a worker as an independent contractor, the option to resolve its case with the IRS and face a reduced employment tax assessment, depending on the consistency of reporting and other common-law factors.

Why This Is Important . . . The CSP makes it easier for businesses that face an employment tax audit to reclassify workers to avoid a protracted administrative or legal battle.

EEC Trademarks

New regulations in the European Economic Community have paved the way for EEC trademark registrations. Active Nicolai Law Group clients have received memorandum outlining the pros, cons and costs of registering an EEC mark, something you need to consider if you do business in Europe.