IRS Plans Consolidated Tip Reporting Program

Yesterday, the Internal Revenue Service (IRS) issued, as a part of Notice 2023-13, a proposed service industry tip reporting program for employers. The proposed program, called the Service Industry Tip Compliance Agreement (SITCA), would be the primary tip reporting program between service industry employers and the IRS. According to the IRS, the new program will improve compliance and make reporting easier for employers. Earlier, in January, the IRS issued standard mileage rate increases for 2023.

Background of the Tip Reporting Program

The IRS intends for its proposed tip reporting program to replace the previous Tip Rate Determination Agreement (TRDA), Tip Reporting Alternative Commitment (TRAC), and Employer-Designed TRAC (EmTRAC). As such, it would be the sole tip reporting compliance program for service industry employers. The program would be available to employers in all service industries with at least one business location (or covered establishment) under one Employer Identification Number (EIN). After acceptance into the program, an employer must ensure that each of its covered establishments meets a minimum reported tips requirement annually. If an employer fails to meet this requirement that calendar year, the specifically covered establishment will be removed from the program retroactively. Furthermore, it would not be eligible to participate in the program again for three years.

Features and Benefits of the Program

According to the IRS, the new program would take advantage of advancements in point-of-sale (POS) systems, time and attendance systems, and electronic payment settlement methods. This would make it easier for employers to report tips to the IRS and, subsequently, improve tip reporting compliance. Specifically, the program includes the following features:

• Using tip data from an employer’s POS system to monitor employer tip reporting compliance while allowing for yearly adjustments to tipping practices.
• Employer annual self-reporting in the program reduces the need for IRS compliance reviews.
• Participating employers in good standing with the program receive protection from liability under section 3121(q), which defines tips as part of an employee’s pay.
• Flexibility to implement tip reporting policies that are best suited for their employees and their business.

Participation in the Tip Reporting Program

To participate in the new tip reporting program, businesses need to meet the following requirements:

• Participate in a service industry that is subject to tipping customers.
• Have at least one covered establishment.
• Comply with federal, state, and local tip reporting laws for three consecutive years right before applying for the program.

In addition, a covered establishment needs to use a POS system to record all sales subject to tipping. That POS system must also accept electronic payment for tips as well as sales. Finally, along with requirements under the program, employers must also abide by relevant recordkeeping requirements under the FLSA. Specifically, this includes keeping all payroll records for at least three years.