Tip credit for professional employer organizations.

• 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 medium-sized businesses to achieve competitive success by assuming the liabilities and responsibilities of employment. They satisfy several goals of Congress, such as making health, welfare and retirement benefits available and extending labor law protection to more private sector employers.

Based on the definition of excess employer's Social Security tax and the restriction in Sec. 45B(b)(2), the PEO is entitled to the tip credit. The employee leasing relationship does not preclude the PEO from claiming the credit, as the PEO is the employer and the tips are received in connection with providing food and beverage for consumption on the premises of a qualified establishment.

The underlying regulations, which function as interpretations of Sec. 45B, do not specifically address the issue of leased employees working at food and beverage establishments for determining die availability of the tip credit to PEOs. Temp. Regs. Sec. 1.45B-1t states that "[iln determining the excess...