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IRS publishes tax guidance on tips for volunteers

Employers in Georgia have a responsibility to pay payroll taxes for their employees. Tip boxes set up for volunteers, however, have created confusion about employee classification and employer tax obligations. The Internal Revenue Service has addressed this issue in an IRS Chief Counsel Memorandum.

The memorandum presented a scenario where an employer classified individuals performing services as volunteers. Tip boxes were placed in the service area, and customers had the option of donating cash to workers at their discretion. The volunteers divvied the tips at the end of the shift without disclosing to the employer the amounts received. Upon performing an audit, the IRS determined that the employer should classify the volunteers as employees for payroll tax purposes. The audit resulted in the agency sending the employer Letter 3523.

The IRS determined that the money received by the workers qualified as tips that an employer had a responsibility to pay taxes upon. The timing of the tax obligation arose once the IRS sent a demand letter to the employer instead of immediately upon the workers receipt of the tips because the employer had not been informed of the amounts.

A business or individual confronted by tax demands from the IRS might gain clarification about how to respond by consulting an attorney. An attorney may interpret notices from the tax agency and review the person's financial records and tax filings. These services may help prepare someone for a tax audit. The attorney may be able to attend the audit and offer advice to the person as auditors ask questions. An attorney may also show evidence of tax compliance or broker a settlement to resolve unpaid taxes. With legal representation, a person might avoid excessive penalties and consequences like a wage levy or tax lien.

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