IRS Addresses 'Tip Boxes'

IRS Addresses 'Tip Boxes'

In a recently released IRS Chief Counsel Memorandum, the IRS addressed cash amounts distributed from “tip boxes.”

As the IRS described the facts, the taxpayer engaged individuals to perform services on its premises; the taxpayer classified the individuals as volunteers, and it did not pay those people compensation or benefits. However, the individuals received cash payments from amounts that customers placed in “tip boxes” near where the services were performed.

As the IRS explained,

Taxpayer places the ‘tip boxes’ to encourage customers to contribute cash amounts to the individuals. Taxpayer does not require customers to make cash contributions and customers have discretion on how much cash to contribute (including zero contribution).

At the end of each shift, then, the individuals decided how to allocate the tip box.  Here, the there was no evidence that the Taxpayer knew the actual amounts received, nor did it issue Forms W-2 or include those amounts on Forms 941.

<fbs-ad role="presentation" aria-hidden="true" ad-id="article-0-inread" position="inread"></fbs-ad>During an audit, the IRS determined that the volunteers should be treated as employees for FICA tax purposes; consequently, the IRS issued a Letter 3523 to the taxpayer. Read more on Forbes.