IRS considering changing how tipped employees report tips

Virus Outbreak Los Angeles
Posted at 12:09 PM, Feb 08, 2023

The Internal Revenue Service announced it is proposing a new voluntary tip reporting program to improve tip reporting compliance by employers of service industry workers, such as servers.

The IRS requires employees who earn at least $20 a month in tips to keep a daily record of their tips to give to their employer. All of those tips are then required to be included on tax returns.

Employers are then required to withhold taxes on income earned from tips.

The IRS said voluntary tip compliance agreements have been established by the IRS for industries where tipping is customary. The IRS has three different voluntary compliance agreements in place:

  • TRAC – Tip Reporting Alternative Commitment
  • TRDA – Tip Rate Determination Agreement
  • GITCA – Gaming Industry Tip Compliance Agreement

The IRS’ proposal would create one voluntary compliance agreement: The Service Industry Tip Compliance Agreement.

The IRS said the program would include several features:

  • The monitoring of employer compliance based on actual annual tip revenue and charge tip data from an employer's point-of-sale system, and allowance for adjustments in tipping practices from year to year.
  • Participating employers demonstrate compliance with the program requirements by submitting an annual report after the close of the calendar year, which reduces the need for compliance reviews by the IRS.
  • 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 announcement comes amid speculation that the IRS is increasing tax enforcement on working-class taxpayers. The IRS said this program is voluntary.

It also comes as the IRS is working to hire 87,000 new employees after the agency struggled to answer customer service questions during the pandemic. The IRS said even with additional staff, they will not be conducting additional audits on Americans making less than $400,000 annually.