According to the Internal Revenue Service's Technical Advice Memorandum (TAM 201347020), a professional employer organization (PEO) is not eligible to claim the income tax credit for portion of employer social security taxes paid with respect to employee cash tips received by its clients' employees in connection with the providing, delivering, or serving of food or beverages for consumption.
Section 45B(a) of the Internal Revenue Code states that the person entitled to the credit for employer FICA taxes paid on employee's tips is the taxpayer who incurs the employer portion of the FICA tax. Generally, the taxpayer who incurs the employer portion of FICA tax is the common law employer, even if another entity is the employer in control of the payment of such wages and the employer FICA tax on the tips (i.e., a PEO). The IRS ruled that a PEO is not the employer of its' clients employees under code section 3401(d)(1), that a PEO is not the common law employer, and did not incur the employer portion of the FICA tax under section 3111 with regard to the tips received by those employees. Thus, the PEO was not entitled to claim the income tax credit for the portion of employer social security taxes paid with respect to employee cash tips received by its clients' employees.
For more information or questions on this topic, please contact a member of the firm's National PEO Practice or your local UHY LLP professional.