Tip credit for professional employer organizations.

• Jurisdiction: United States
• Date: 01 October 1997
• Author: Appel, David W.

A food and beverage establishment is allowed a general business credit for the amount of the employer's excess FICA tax obligations attributable to employee tips received on the establishment's premises, in excess of those tips treated as wages for purposes of satisfying the minimum wage rate applicable to such individuals under Section 6(a)(1) of the Fair Labor Standards Act of 1938 (FLSA). Under Sec. 45B(b)(2), the "excess employer's social security tax" is taken into account only for tips received from customers in conjunction with providing food or beverage for consumption on the premises of an establishment at which tipping of employees serving the food or beverages is customary or for tips received from customers in connection with the delivery of food to the customer if the tipping by customers is customary. Who is entitled to claim the tip credit when the food or beverage establishment leases its employees from a professional employer organization (PEO)?

The PEO industry is one of the fastest-growing industries in the 1990s. A PEO is an organization that provides an integrated and cost-effective approach to the management of critical human resources and assumes responsibility of employer risk for its clients. PEOs deliver these services by establishing and maintaining an employer relationship with the workers assigned to their clients, and by contractually assuming substantial employer rights, responsibilities and risks from these clients. PEOs assist small and...