Assessing Employer FICA Tax on the Estimated Aggregate Unreported Tips of Employees: Quietwater Entertainment, Inc. v. United States
Jonathan H. Lehr
In Quietwater Entertainment, Inc. v. United States, the U.S. District Court for the Northern District of Florida held that the Service is not authorized to assess an employer’s share of FICA taxes based on an estimate of employees’ aggregate unreported tips. The court distinguished a recent Eleventh Circuit decision, Morrison Restaurants, Inc. v. United States, which held that the Service did have statutory authority to make such an assessment. The district court ruled that an employer-only FICA tax assessment was inconsistent with the purpose of the Social Security Act, that the assessment overestimated tip income subject to taxation, and that section 6053(c)(3) capped employer FICA taxes on unreported tip income at eight percent.Part I of this Note reviews the Code provisions at issue and summarizes the facts of Quietwater. Part II outlines the parties’ arguments and the court’s reasoning. Part III analyzes the decision and argues that the Service is authorized to use a modified formula to estimate aggregate unreported tips, and that such a formula does not exaggerate unreported tip income.
BACK TO CONTENTS PAGE