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Restaurant workers and other tipped employees are supposed to report all of their tips to their employers. And employers are supposed to pay Social Security and Medicare (FICA) taxes and withhold income taxes and the employee's share of FICA taxes from the reported tips. Of course, what's supposed to happen doesn't always come to pass. In reality, many tipped employees do not report all of their tips to their employers--and, of course, no taxes are paid on the unreported tips.
To crack down on the problem without going through the time-consuming process of individually auditing and assessing each and every tipped employee, the IRS adopted a practice of making employer-only tip assessments. Under this practice, the IRS simply assessed an employer for its share of FICA tax on an estimated amount of unreported tips.
This practice drew complaints from employers and spawned a series of lawsuits challenging the assessments. The results of those lawsuits were inconsistent. A number of appellate courts, including the Seventh, Eleventh, and Federal Circuit Courts, upheld the employer-only assessments. However, in a case decided last year, the Ninth Circuit Court of Appeals struck down the practice. So the U.S. Supreme Court stepped in to resolve the issue.
HIGH COURT APPROVAL * Reviewing the Ninth Circuit decision, a divided Supreme Court has held that the IRS may estimate an aggregate amount of unreported tips received by an …