Are tips considered wages for FICA taxation purposes?

Tips are indeed considered wages for FICA taxation purposes. This classification is based on the structure of the Federal Insurance Contributions Act (FICA), which mandates that both earned income and tips are subject to Social Security and Medicare taxes. When an employee receives tips, whether directly from customers or through a tip-sharing arrangement, these amounts are included as part of their gross income and are taxable.

Additionally, it is important for employees to report these tips accurately, as reported income ensures proper taxation and allows for the correct calculation of Social Security benefits. Employers are responsible for collecting FICA tax from employees' wages, including the reported tips. This system helps ensure that all income, regardless of the source, contributes to the Social Security fund, thereby protecting the broad coverage of benefits for future retirees and individuals with disabilities.