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Do Tips Count as Income?

The IRS wrestles with restaurants over tip reporting and scores a big win.

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This story appears in the October 2002 issue of Entrepreneur. Subscribe »

The restaurant industry and other small businesses employing workers who receive tips recently took a hit from the Supreme Court. In June, the court ruled that the IRS has the right to charge restaurants additional Social Security taxes if it believes employees are underreporting their tips.

Seven out of 10 restaurants are small businesses, many of which operate with slim margins, says Peter Kilgore, general counsel and senior vice president of operations for the National Restaurant Association. The restaurant industry maintains that holding employers liable when the IRS fails to determine which workers failed to report tips pits restaurant owners against their own employees.

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