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Yes, as an employer, you do have liability for the employer share of social security and Medicare taxes on tips that your employees receive but do not report to you. However, this liability does not arise immediately. According to section 3121(q) of the Internal Revenue Code, tips received by an employee in the course of employment are considered remuneration for that employment and are deemed to have been paid by the employer for purposes of the employer share of FICA taxes (which include social security and Medicare taxes).
If an employee fails to report tips to you, the employer, you are not liable for the employer share of FICA taxes on those unreported tips until the Internal Revenue Service (IRS) issues a notice and demand for the taxes. This notice and demand will specify the amount of tips received by the employee and the period to which the tips relate. The IRS will notify you in writing, and this document must include the words "notice and demand" and "section 3121(q)" to be valid.
Once the notice and demand is issued, you must make deposits for the employer share of FICA taxes as required by section 6302 of the Code and the corresponding regulations. The amount of employer FICA taxes shown on the notice and demand is treated as employment taxes accumulated by you on the date the notice and demand is made.
It is important to note that while you are liable for the employer share of FICA taxes on unreported tips after the notice and demand, you are not required to withhold and pay the employee share of FICA taxes on those unreported tips. The employee remains responsible for reporting and paying their share of these taxes.
In summary, your liability for the employer share of social security and Medicare taxes on unreported tips arises only after the IRS issues a notice and demand for those taxes.
Sources:
Publication 4268 (8/2022)
§ 3402. Income tax collected at source
Publication 531 (2023)
Publication 1244 (8/2005)
§ 3121. Definitions
Rev. Rul. 2012-18
