Type of Submission

Refereed Article


The recent Supreme Court Case, U.S. v. Fior D'ltaIia, Inc. (2002), has given the Internal Revenue Service broad new authority to conduct audits of restaurant owners in order to estimate and assess the amount of FICA taxes owed for employee tips and wages. The court approved the use by the IRS of the "aggregate method" to estimate the amount of tips received by employees in employer tax audits without requiring the prior audits of individual employees. The decision will force restaurant employers to become much more actively involved in obtaining accurate information from their employees as to the precise amount of their tip income in order to avoid the "employer first" audits. As such, the various alternatives for restaurant owners in deciding how to handle employee tips and FICA taxes are better understood.