FICA on tips.

• Author: Laffie, Lesli S.
• Position: Restaurant's tax liability

Resolving a conflict among the circuits, in Fior D'Italia, Inc., S.Ct., 6/17/02, the Supreme Court reversed the Ninth Circuit and held that the IRS properly calculated a restaurant's FICA tax liability by basing the assessment on an aggregate estimate of all employee tips. The Court overturned the Ninth Circuit's determination that the IRS should have computed total tip income by first estimating each individual employee's tip income separately, then adding individual estimates together to create a total.

According to the Court, the FICA statute did not bar usage of an aggregate estimation method, and neither Sec. 446 (which authorizes the IRS to use estimation methods for determining income tax liability) nor Sec. 6205 (which authorizes the issuance of regulations governing employers' adjustment of FICA tax liability), limited the IRS's authority to use the aggregate estimation method.

Despite the facts that the aggregate estimate might have included certain tips that should have been disregarded in computing FICA tax and that cash customers might have left smaller tips than customers who charged their meals (and on whose credit card slips the IRS estimates were made), the employer failed to show that the aggregate estimate was so unreasonable as to violate the law. Moreover, the...