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April 24, 2002
Court Hears Dispute Over Tips, Social Security
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a dispute closely followed by the restaurant industry, the U.S. Supreme Court on Monday heard a case expected to resolve how the nation's restaurants pay Social Security taxes on their employees' tips.

According to the Internal Revenue Service, those tips totaled $14.31 billion in 1999.

Fior d'Italia of San Francisco, one of the nation's oldest Italian restaurants, is challenging an extra $23,000 Social Security tax that was calculated on estimates.

The Associated Press says the case hinges on an IRS policy in which the agency levied Social Security taxes on audited restaurants based on assumptions of the tips workers earn, rather than the actual amount.

Determining taxes from tips has long been a troublesome task; often, the tips are cash, and workers handle their own paperwork.

Restaurants must pay 7.65 percent Social Security taxes on the amount of tips their employees generate. The employee also must pay the same percent of the total.

In Fior d'Italia's case, a San Francisco-based federal appeals court ruled last year the IRS cannot estimate how much a restaurant owes in Social Security taxes. Rather, it found, the IRS must audit the tip earners and not "slap the employer with assessments based on ... estimates."

But other circuits have sanctioned estimates, forcing the nation's highest court to resolve the conflict, according to the AP.

In briefs to the high court, the federal government said the IRS was authorized to estimate the amount of Social Security taxes. Solicitor General Theodore Olson also told justices that, if the IRS were to audit individual tip earners from a restaurant, its audits would be based on assumptions as well.

"It is obvious that any cash tips that are not reported on the credit charge slips retained by the employer cannot be traced and determined with precision," Olson wrote. "A method of estimation based on the average tip rate and the gross sales of the restaurant is far more likely to achieve factual accuracy than the individual audits suggested by the court of appeals."

But Tracy J. Power, the restaurant's attorney, said the government's position is flawed. Larive said waiters, waitresses and bartenders, for example, don't earn the amount of tips shown on credit card receipts. The workers share tips with lower-rung employees, some of whom are exempt from paying taxes on their nominal tips.


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