Attention employers…the Treasury and Internal Revenue Service have issued a notice proposing a tip reporting program for employees in the service industry. Here are the details.

Some background on tips

It is the employees’ responsibility to report their tips to the employer. However, it is also the employer’s job to educate and inform the employees of their responsibility to report 100% of their tips.

The employer needs this information to include in the quarterly and annual payroll reports required to be reported to the state and IRS.

The employees should be providing their employer a reporting of tip income for each payroll period (at least bi-weekly). The form of reporting can be done through a Form 4070 or any other format that provides the required information.

This, understandably, results in hefty administrative burdens, and an estimated $1.66 billion in unreported tip income annually.

What’s the new reporting system?

There are several features in the proposed Service Industry Tip Compliance Agreement (SITCA) voluntary tip reporting program. These include:

• Employer compliance monitoring- This would be based on annual tip revenue and credit card charge tip data from an employer’s point of sale system. Employers will be able to adjust tipping practices each year, if needed.
• Annual report at the close of the calendar year- This will demonstrate compliance with program requirements, thus eliminating the need for IRS compliance reviews.
• Protection for employers from liability- The new rules propose a stipulation that tips are part of an employee’s pay provided they remain compliant with program requirements
• Employers can use tip reporting policies that are best fit for their employees and business model

If passed, the SITCA program will be the sole tip reporting program for employers. Hence it will replace the Tip Rate Determination Agreement (TRDA), Tip Reporting Alternative Commitment (TRAC) and Employer Designed TRAC (EmTRAC).

Make note that the proposed program does not impact the existing Gaming Industry Tip Compliance Agreement (GITCA) program.

If you have any of the existing agreements listed above, they will remain in effect until the earlier of:

• Your acceptance into the SITCA program
• Determination from the IRS that you are noncompliant with the TRDA, TRAC or EmTRAC agreement
• The close of the first full calendar year following the final revenue procedure published by the IRS

The IRS is welcoming feedback on the proposed program until May 7, 2023. Submit your questions and comments one of two ways:

(1) Mail. Send paper submissions to CC:PA:LPD:PR (Notice 2023-13), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

(2) Electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and Notice 2023-13) by following the online instructions for submitting comments. Once submitted to the Federal Rulemaking Portal, comments cannot be edited or withdrawn. Commenters are strongly encouraged to submit public comments electronically. The Treasury Department and the IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper, to its public docket.

Questions? Contact us.