Administration May 6, 2003

US Supreme Court Bolsters Tip Tax Collections

June 17, 2002 (PLANSPONSOR.com) - The Internal Revenue Service (IRS) can use estimates to make sure it is collecting enough taxes on cash restaurant tips, the US Supreme Court said.

Reported by

Fred Schneyer

The court beefed up the IRS’s power to calculate taxes that businesses owe from employees’ tips, a thorny task because often the tips are cash and workers report their own earnings, according to an Associated Press report.

The ruling is a defeat for the estimated 200,000 restaurants with tipped workers, and many other businesses whose employees receive tips.

The court said the IRS can estimate the amount of cash tips given to employees based on tips as shown on credit-card receipts. The estimate is used to determine taxes.

Nationwide, employees reported collecting $14.3 billion in tips in 1999, although the IRS suspects that amount could be higher and has been working with restaurants to improve reporting.

This case pitted one of the nation’s oldest Italian restaurants against US tax collectors. The restaurant contends the IRS formula doesn’t take into account stingy cash tips, takeout meals or tip sharing among hostesses and other staff, according to the AP.