Rev. Rul. 66-369

Advice has been requested whether tips which are reported in writing by an employee to his employer, and which are taken into account by the employer in determining the employee's compensation under a state minimum wage law, are `wages' for purposes of the tax imposed by the Federal Unemployment Tax Act (chapter 23, subtitle C, of the Internal Revenue Code of 1954).

Under the Employment Tax Regulations relating to the Federal Unemployment Tax Act, the term `wages' means all remuneration for employment, with certain exceptions of which only one is here material. Section 31.3306(b)-1(j)(3) of the regulations provides for the exclusion from `wages' of `Tips or gratuities paid directly to an employee by a customer of an employer, and not accounted for by the employee to the employer.'

For purposes of section 31.3306(b)-1(j)(3) of the regulations, tips received by an employee are `accounted for' only to the extent that the employee reports the tips to employer, and the tips bear a relationship to the total amount of the employee's remuneration. In addition to any reporting of tips which his employer may require, an employee is subject to the tip reporting requirements of section 6053(a) of the Internal Revenue Code of 1954. Under section 6053(a), which was added to the Code by section 313 of the Social Security Amendments of 1965, Public Law 89-97, C.B. 1965-2, 601, at 606, an employee who receives cash tips amounting to $20 or more in any calendar month after 1965, in the course of his employment by an employer, must report the tips to his employer by furnishing one or more written statements not later than the 10th day following the month of receipt. Reporting the tips pursuant to section 6053(a) of the Code, however, does not in itself mean that the tips have been `accounted for' by the employee to the employer within the meaning of the regulations. See Revenue Ruling 66-54, C.B. 1966-1, 241.

The minimum wage law of the State here involved provides, among other things, that, in those industries where tips are customarily a recognized part of an employee's wages for hiring purposes, an employer may become qualified to count the tips of the employee, in an amount not to exceed a stated sum per hour, as part of the required minimum hourly wages. The qualified employer is granted an allowance for the tips, as an amount stated in terms of a specified sum per hour, if the employer furnishes substantial evidence that tips to the extent of the allowance have actually been received by the employee. This situation fixes a definite relationship between the gratuities received by the employee and the compensation to be paid by the employer to the employee.

In the instant case, the tax under the Federal Unemployment Tax Act applies to tips received by an employee in the course of his employment by the employer, to the extent that the tips (1) are reported in writing by the employee to the employer, and (2) are taken into account by the employer to the extent permitted in determining the employee's compensation under the State minimum wage law. For this purpose, on or after January 1, 1966, tips should be deemed received by the employee only to the extent that the employee reports the tips in writing to the employer.

Example (1) .-Assume that the total amount of tips the employee reported in writing to the employer for the month of January 1966 is $75, and that the employer was permitted to take $50 of this amount into account in determining the employee's compensation under the State minimum wage law. The Federal unemployment tax applies to the $50. The remaining $25 which was not taken into account is not subject to the Federal unemployment tax. Note, however, that if the $75 was reported by the employee on or before February 10, 1966, as required by section 6053(a) of the Code, the employer is required to treat the entire $75 as subject to the employee tax imposed by the Fedral Insurance Contributions Act by the Federal Insurance Contributions Act of Income Tax at Source on Wages (chapters 21 and 24, respectively, subtitle C, of the Code).

Example (2) .-Assume that the total amount of tips the employee reported in writing to the employer for the month of February 1966 is $30, but that the employer nevertheless was permitted to use $40 in determining the employee's compensation under the state minimum wage law. The Federal unemployment tax applies to the $30 inasmuch as only $30 was reported by the employee.

The circumstances in the instant case do not differ substantially from those stated in Revenue Ruling 58-168, C.B. 1958-1, 343, which held that tips or gratuities, accounted for by an employee to the employer for purposes of determining the employee's compensation under the minimum wage act of a State, constitute `wages' for Federal employment tax purposes. That ruling was based on the assumption that the employer could establish the amount of tips received by the employee, but the method of establishing the amount was not described. The present ruling differs from Revenue Ruling 58-168 to the extent that, for purposes of section 31.3306(b)-1(j)(3) of the regulations, the amount of tips received on or after January 1, 1966, can be established only on the basis of the employee's written reports to the employer.

Further, Revenue Ruling 58-168 is inapplicable in determining the status of tips received on or after January 1, 1966, for purposes of the Federal Insurance Contributions Act and the withholding of income tax under section 3402 of the Code. Amendments to those chapters by section 313 of the Social Security Amendments of 1965 govern the status of tips received after 1965.

In view of the foregoing, Revenue Ruling 58-168, C.B. 1958-1, 343, remains applicable only to tips received before January 1, 1966.