Here’s how reporting tips would change under new IRS proposal

(File: Getty)

(NEXSTAR) – A program proposed by the Internal Revenue Service earlier this week would change how service industry employees and employers report taxable tips.

The Service Industry Tip Compliance Agreement (SITCA) is designed to leverage income and other information gleaned from employer devices and to replace three current tip reporting programs in the process.

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

The program would make sure employers were following reporting rules by using “actual annual tip revenue and charge tip data from an employer’s point-of-sale system,” according to the IRS. There would be an allowance in place in case of any changes in tipping norms from one year to the next.

Employers would have to submit an annual report at the end of the calendar year, which the IRS says would reduce the need for compliance reviews.

The IRS also had this guidance for employers:

  • Participating employers receive protection 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.
  • Participating employers have 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.

The IRS says that the new program would not affect the gaming industry, which has its own compliance rules.

According to current IRS rules, an employee must report any tips made in a single month, whether in cash or gifts, if the value is more than $20. “Employees must report tips to the employer by the 10th of the month after the month the tips are received,” according to the IRS.

The three programs currently governing tip reporting compliance in the service industry are:

  • Tip Rate Determination Agreement (TRDA)
  • Tip Reporting Alternative Commitment (TRAC)
  • Employer designed TRAC (EmTRAC)

The IRS encourages anyone who wants to give feedback on the new proposal to respond by May 7, 2023.


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