If an employer cannot collect Social Security/Medicare due on reported tip income, what must they do?

The correct option is to report the uncollected amount on the employee's W-2 in Box 12. This procedure is significant because Box 12 is designated for reporting various types of compensation and benefits that are not included in the regular wage and tax reporting sections of the W-2. When an employer cannot collect Social Security (SS) and Medicare taxes from reported tip income, the responsibility is to ensure that the information is still accurately reported to the IRS, even if the taxes themselves remain uncollected.

This reporting also helps ensure that the employee's earnings are correctly documented, which is essential for their future Social Security benefits. It assists in maintaining accurate records for both the employee and the government, adhering to tax compliance requirements.

In contrast, paying the employee's share directly, while sometimes considered in circumstances where the employer wishes to ensure compliance or maintain good employee relations, does not address the reporting requirement. Options suggesting reporting in Boxes 4 and 6 are incorrect because those boxes are used exclusively for reporting amounts that are withheld or collected; they are not intended to report uncollected amounts. Lastly, the notion of not reporting uncollected amounts until they are collected does not fulfill the IRS requirements for transparent reporting and could lead to potential penalties