IRS Proposes New Tip Reporting Program
by David Klemt
The Internal Revenue Service is proposing a voluntary tip reporting program which they’re calling the Service Industry Tip Compliance Agreement (SITCA).
Making the announcement via Notice 2023-13 back in February, the IRS is giving people the chance to comment on the SITCA proposal.
Per the IRS, their intention is to “take advantage of advancements” in POS, scheduling, and e-payment technology. How do they intend to leverage all this tech? In short, the IRS is proposing that POS systems will have to process payments and tips in the same way.
To clarify further, if someone pays by credit card, they’ll have to tip via credit card. If a guest pays in cash, they’ll have to tip in cash. So, should SITCA become the industry standard, the days of paying with a credit card but leaving a cash tip will be over.
However, in my eyes, this isn’t a simple “modernization” of IRS processes.
If the IRS is proposing a new for businesses to process tips, they’re looking to catch non-compliant businesses and tipped workers. A likely culprit or contributing factor to this IRS scrutiny? The retail venues now asking for or suggesting tips when customers check out.
So, it would be wise to reiterate to your team the need to report tips accurately. And remember, business owners need to ensure they’re complying with tip reporting as well. Getting flagged for inaccurate reporting is a great way to catch an audit, penalties, and a huge bill.
Nuts and Bolts
According to the IRS, SITCA will reduce taxpayer burdens. And, of course, the service claims the program will also reduce their own administrative costs.
Additional “features,” per the IRS website, are as follows:
- The monitoring of employer compliance based on actual annual tip revenue and charge tip data from their point-of-sale system. There will be 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. This reduces the need for compliance reviews by the IRS.
- Employers participating in SITCA will 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 best suited for their employees and business model. Policies must be in accordance with the section of the tax law that requires employees to report tips to their employers.
Requests for Comment
Interestingly, Notice 2023-13 contains a request for comments in four specific areas:
- By what means a technology-based time and attendance system may be used by tipped employees to report tips. This includes tips in cash and other forms of tipping made through electronic payments methods (other than a credit card), regardless of whether the tips are received directly from customers or through tip sharing arrangements.
- How tip sharing practices vary across service industries and how the SITCA program can support employer participation while accommodating potential differences in Federal, state, and local labor and employment law requirements.
- By what methods employers of large food or beverage establishments participating in the SITCA program may meet their filing and reporting obligations under section 6053(c) and also satisfy the SITCA program requirements for compliance, while minimizing the administrative burdens on taxpayers and the IRS.
Those interested in providing such feedback have until May 7, 2023 to do so. The IRS has set up two ways to provide comments on Notice 2023-13:
- Mail: CC:PA:LPD:PR (Notice 2023-13), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044; or
- Electronic: Visit the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and Notice 2023-13) and follow the instructions for comment submission.
Personally, I have more questions than comments. Bear in mind, the IRS will stop accepting comments, feedback, and questions on May 7, 2023.