February 16, 2023

IRS proposes new tip reporting program that would affect restaurants, tipped workers

Although voluntary, changes would be significant.
Restaurant bill with tip
Tax filing season is heating up for many employees. What better time than now for the Internal Revenue Service (IRS) to announce changes to the way tips get reported? 

The National Tip Reporting Compliance Program (NTRCP), which is part of the tax agency’s Small Business/Self-Employed Division, proposed that a revenue procedure known as the Service Industry Tip Compliance Agreement (SITCA) would replace the existing Tip Reporting Alternative Commitment (TRAC), Tip Rate Determination Agreement (TRDA), and Employer designed TRAC (EmTRAC).

According to the Treasury Inspector General for Tax Administration (TIGTA), approximately $1.66B in tipped compensation was unreported during the 2016 tax year.

The IRS claims that SITCA would capitalize on advancements in point-of-sale (POS) technology, time and attendance systems, and electronic payment settlement methods, all to improve tip reporting compliance.

Under SITCA:
  • Employees are not required to report tips at an hourly rate.
  • Employers are not required to provide educational or tip reporting training programs to their employees as is the case in the existing TRAC program. 
  • Employees no longer will receive tip examination audit protection. 
  • Eligible restaurants that do not meet SITCA’s minimum reported tip requirement will not be automatically renewed. 
  • Employers that demonstrate their restaurants or “Covered Establishments” have satisfied SITCA requirements for each calendar year will receive protection from liability under section 3121(q). 
In its examination of tip reporting compliance, TIGTA also noted that the IRS has provided tip income audit protection to noncompliant employers, and in some cases, their employees. 

Tips and the opportunity to increase earning potential are often what attract workers to the restaurant industry. Voluntary tip reporting programs allow restaurants to improve and streamline compliance with the IRS income tax collection, while protecting employees who participate in the program. Further, effective tip reporting systems help employees qualify for mortgages and loans while building Social Security, supporting IRS revenue collection, and easing the burden of employer administration. 

A transition period will provide restaurants with the opportunity to phase out of existing tip reporting agreements and become accepted into the SITCA program. 

The Association is establishing a working group to review the IRS’s proposal and intends to submit comments by May 7. Contact Association VP, Public Policy Aaron Frazier to join the working group and/or for more details.