Regarding employees' reported tips, which statement is correct regarding tax reporting and withholding?

• A. Report taxes on tips separately when making an employment tax deposit
• B. Report tips as wages on Form W-2 and pay the employer portion of Social Security and Medicare taxes
• C. Withhold and pay only the employees' portion of Social Security and Medicare taxes on tips
• D. Report and pay the employer portion of Social Security and Medicare taxes on the portion of cash tips above the federal minimum wage

Answer: (B)

Tips received by employees are treated as wages for payroll tax purposes. That means the full tip income is included in the employee’s wages reported on Form W-2, and the employer must handle payroll taxes on those tips just as they do for regular wages. The employer withholds the employee’s share of Social Security and Medicare taxes on tip income and also pays the employer’s matching portion of those taxes. In short, tip income is reported on Form W-2 as wages, and the employer covers the employer portion of FICA taxes on those tips. The other options would misstate how these taxes are reported or who pays them.