Since the IRS tip program was introduced, voluntary compliance has significantly increased. In 1995, tip wages reported were $9.45 billion. Now the amount exceeds $18 billion. To date over 15,000 employers have entered into tip agreements, representing nearly 47,000 individual establishments. Our CPA tax and accounting firm in New York City can help you understand the implications of the IRS tip program. Please contact us for further guidance.
The tip program offers employers multiple voluntary agreement options designed to provide non-burdensome methods for employers and employees to comply with tip reporting laws. Options include:
- Tip Rate Determination Agreement (TRDA);
- Tip Reporting Alternative Commitment (TRAC);
- EmTRAC – Employer-designed TRAC.
The tip agreements have common elements including:
- Education – To help employers and employees better understand the federal tax laws regarding tips;
- Simplification – To make it easier for tipped employees to calculate their tips, report their tips and pay their taxes;
- Burden Reduction – To reduce the likelihood of, and to ease the financial burdens associated with, a tip examination.
Tip Rate Determination Agreement (TRDA)
- Requires the IRS to work with the business to arrive at a tip rate for its various occupations.
- Requires the employee to enter into a Tipped Employee Participation Agreement (TEPA) with the employer.
- Requires the employer to get 75% of the employees to sign TEPAs and report at or above the determined rate.
- Provides that if employees fail to report at or above the determined rate, the employer will provide the names of those employees, their SSNs, job classification, sales, hours worked, and amount of tips reported.
- Has no specific education requirement.
- Participation assures the employer that prior periods will not be examined as long as participants comply with the requirements under the agreement.
Tip Reporting Alternative Commitment (TRAC)
- Does not require that a tip rate be established but it does require the employer to:
- Establish a procedure where a directly tipped employee is provided (no less than monthly) a written statement of charged tips attributed to the employee.
- Implement a procedure for the employees to verify or correct any statement of attributed tips.
- Adopt a method where an indirectly-tipped employee reports his/her tips (no less than monthly).
- Establish a procedure where a written statement is prepared and processed (no less than monthly) reflecting all cash tips attributable to sales of the directly-tipped employee.
- Does not require an agreement between the employee and the employer.
- Affects all (100%) employees.
- Provides that if the employees of a business collectively underreport their tip income, tip examinations may occur but only for those employees that underreport.
- Includes a commitment by the employer to educate and reeducate quarterly all directly and indirectly-tipped employees and new hires of their statutory requirement to report all tips to their employer.
The IRS developed the EmTRAC Agreement program in response to employers in the food and beverage industry who expressed an interest in designing their own TRAC programs.
EmTRAC Agreements are available to employers in the food and beverage industry whose employees receive both cash and charged tips. The EmTRAC program retains many of the provisions in the TRAC agreement including:
- The employer must establish an educational program that trains employees that the law requires them to report all their cash and charged tips to their employer.
- Education must be furnished for newly hired employees and quarterly for existing employees.
- The employer must establish tip reporting procedures under which a written or electronic statement is prepared and processed on a regular basis (no less than monthly), reflecting all tips for services attributable to each employee.
The EmTRAC program provides an employer with considerable latitude in designing its educational program and tip reporting procedures, which the employer may combine.
These agreements are designed to enhance tax compliance among tipped employees through taxpayer education, instead of through traditional enforcement actions, such as tip examinations. If you have any questions related to these options, please contact our office.