IRS Proposes New Program for Reporting Tips Across Service Industry

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The Internal Revenue Service (IRS) on Feb. 6 issued proposed guidance for a voluntary tip-reporting program between the agency and employers across an array of service industries.

Notice 2023-13 contains a proposed revenue procedure that would establish the “Service Industry Tip Compliance Agreement” (SITCA) program, which the IRS says would serve as the sole tip-reporting compliance program between the IRS and employers in all service industries.

The new program, which would be voluntary, would replace three other programs: the Tip Rate Determination Agreement (TRDA), the Tip Reporting Alternative Commitment (TRAC), and the Employer designed TRAC (EmTRAC).

The IRS notice is seeking public comment on the proposed program until May 7, 2023.

According to the agency, the proposed SITCA program is “designed to take advantage of advancements in point-of-sale, time and attendance systems, and electronic payment settlement methods to improve tip reporting compliance.”

“The proposed program would also decrease taxpayer and IRS administrative burdens and provide more transparency and certainty to taxpayers,” the IRS said.

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Key Details

Specifically, the program would include the monitoring of employer compliance based on actual annual tip revenue and would charge tip data from an employer’s point-of-sale system, such as a debit or credit card machine or cash register, and allowance for adjustments in tipping practices from year to year.

Participating employers would submit an annual report after the close of the calendar year, which the IRS says would reduce the need for compliance reviews by the agency.

Employers who participate would also be protected from liability under the rules that define tips as part of an employee’s pay for calendar years in which they remain compliant with program requirements.

In addition, participating employers would also be granted the flexibility to implement employee tip-reporting policies that are “best suited for their employees and their business model” in accordance with the section of the tax law that requires employees to report tips to their employers.

Eligible employers are defined by the IRS as those in the service industry where employees perform services for customers that generate tips from customers, have at least one covered establishment, and comply with federal, state, and local tax laws for the three completed calendar years immediately after their submitted application is filed, as well as the calendar quarters after the application is filed, and through any calendar quarters during which the employer’s application is pending for some or all of the quarter.

Once accepted into the program, the employers must continue to satisfy those requirements to continue participating in it, according to the IRS.

Gaming industry employers are excluded from the voluntary program while the IRS is “continuing to explore opportunities within” that industry.

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Americans Changing How They Tip

The IRS requires employees to maintain a daily record of their tips and report them to their employer by the 10th of the month after the month they are received if they are more than $20 per month.

Employees must also then report all of their tips on their individual income tax returns.

The latest proposal comes as data from mobile payment company SquareUp suggests that Americans are tipping more at restaurants, despite inflation soaring this past year.

According to the data, total tips received in the fourth quarter of 2022 jumped 16.5 percent year over year at full-service restaurants and 15.9 percent at quick-service restaurants.

However, separate data from CreditCards.com published in 2022 suggested that Americans are now slightly worse tippers now than they were before the COVID-19 pandemic and soaring inflation, which has left their wallets feeling stretched.

That survey found that the number of restaurant goers who always tip servers or wait-staff at sit-down restaurants has been decreasing steadily from 2019 to 2022, dropping from 77 percent prior to the pandemic to 73 percent in 2022.

Ted Rossman, senior industry analyst at CreditCards.com., said the decline in tipping is likely connected to inflation, which has slashed consumers’ purchasing power, and a tight labor market, which has left many service industry businesses understaffed and “struggling to provide top-notch customer experiences.”