Ted Cruz Says IRS Tip Proposal Would Unnecessarily Overtax Workers — How It Works

Election 2024 No Texans, Washington, United States - 09 Feb 2023
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One person who’s not happy with the most recent proposed IRS guidelines on reporting tips is Senator Ted Cruz (R-Texas). He’s gone as far as to call the measure “next level cruelty,” as reported by Money Wise, and his thoughts appear to mirror those belonging to other GOP legislators who believe the new tax strategy is just one more way the IRS is “punishing everyday Americans.”

As GOBankingRates previously reported, the IRS (with guidance from the U.S. Department of Treasury) introduced Notice 2023-13 on Feb. 6, formally proposing the Service Industry Tip Compliance Agreement (SITCA) program. The proposed program “aims to leverage advancements in point-of-sale, time and attendance systems and electronic payment settlement methods to improve tip reporting compliance.”

In essence, this new structure would allow employers to voluntarily report tips made by their hires and, as a result, likely increase the tax burden on service workers. “The program is intended to improve gratuity reporting compliance and reduce the estimated $1.66 billion in annual unreported tip income,” per Money Wise.

The proposal would see employers collect information regarding all tips provided by a customer at the point of sale — information which employers would turn over to the IRS in addition to an estimation of cash tips their employees receive. While the IRS suggested this will ease the reporting process for service workers (they will only need to report their base income going forward) and employers, many have voiced opposition.

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Some — like Mike Palicz, federal affairs manager at Americans for Tax Reform — claim SITCA is one of the measures related to the purported hiring of 87,000 new tax agents — and that the IRS will target everyday workers rather than taxes owed by wealthy earners. Rep. Thomas Massie (R-Ky.) also recently tweeted, “Stop the presses. No need to raise the debt limit. Biden is going after those billionaire waitresses’ tips.”

However, claims of an auditor army being hired have been disputed by sources such as CNN, with writer Katie Lobosco stating that there have been gross exaggerations about how the $80 billion in funding for the IRS will be used. The White House has also rejected this allegation.

Strictly speaking, if you make more than $20 in tip income during a one-month period, it must be reported to your employer (and thus be recorded as income on your tax return). However, there hasn’t been a clear way to monitor compliance in the past, as much of the figures relied on estimations and blurry guidelines on who should be responsible for reporting (employers vs. employees).

Per Money Wise, there are two programs currently in place that SITCA looks to improve upon — the Tip Rate Determination Agreement (TRDA), where the IRS and employers come to an agreement on selected tip rates, and the Tip Reporting Alternative Commitment (TRAC), where “employers prepare a monthly report on tip income based on disclosures from employees who receive cash tips.”

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The IRS indicated that accurately reporting tip income could actually benefit service workers via an increase in reported adjusted gross income AGI. The agency noted that doing so could improve “retirement contributions, Social Security and Medicare contributions, and increase their eligibility for mortgage loans.”

The proposal is open for public comment until May 7.

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