IRS Introduces New Tip Reporting Program — How It Works

Confident female barista counts tips stock photo
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The U.S. Treasury Department and the Internal Revenue Service have issued proposed guidance for voluntary tip reporting between the agency and employers in various service industries.

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According to Notice 2023-13, which was issued by the IRS on Feb. 6, the proposed revenue procedure would establish the Service Industry Tip Compliance Agreement (SITCA) program. SITCA aims to leverage advancements in point-of-sale, time and attendance systems and electronic payment settlement methods to improve tip reporting compliance.

The IRS noted that this new program would lower taxpayer and administrative burdens while providing more transparency and certainty.

Several features of the program include:

  • The monitoring of employer compliance based on annual tip revenue and charge tip data from the point-of-sale system. The program would also adjust for changes in tipping practices from year to year.
  • Participating employers will submit an annual report to reduce the need for compliance reviews by the IRS.
  • Participating employers would receive protection from liability under rules that define tips as part of an employee’s pay during the years that they remain compliant with program requirements.
  • Participating employers can implement their own employee tip-reporting policies according to tax law.
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The SITCA program will serve as the only tip-reporting compliance program for employers in various service industries, the IRS said. Tip Rate Determination Agreement (TRDA), Tip Reporting Alternative Commitment (TRAC) and Employer designed TRAC (EmTRAC) will be replaced.

Existing compliance procedures will remain in effect until the employer is accepted into the SITCA program, the IRS deems the employer noncompliant with their current agreement or after the end of the first full calendar year after the final revenue procedure is published in the Internal Revenue Bulletin.

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If you’re interested in providing feedback regarding the proposed SITCA program, the IRS says to follow the instructions in the notice and reply by May 7, 2023.

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Josephine Nesbit is a freelance writer specializing in real estate and personal finance. She grew up in New England but is now based out of Ohio where she attended The Ohio State University and lives with her two toddlers and fiancé. Her work has appeared in print and online publications such as Fox Business and Scotsman Guide.
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