Publication 1875 (8-2006) TIPS ON TIPS: A GUIDE TO TIP INCOME REPORTING FOR EMPLOYERS IN THE FOOD AND BEVERAGE INDUSTRY

The Internal Revenue Service (IRS) began its Tip Rate Determination/Education Program (TRD/EP) in October 1993 for the food and beverage industry. The objective of the Program has been to improve and ensure compliance by employers and employees with statutory provisions relating to tip income.

The Program of Tip Reporting

What tip reporting options are available?

Under the

, you may enter into either the TRDA or TRAC arrangement. The IRS will help you understand and meet the requirements for participation. The next pages show you how these two arrangements differ.

What’s in it for me?

 TRDA                          TRAC

 ----------------------------------------------------------------------

 TRDA requires the IRS to      TRAC does not require that a tip rate

 work with the establishment   be established but it does require the

 to arrive at a tip rate for   employer to:

 the various restaurant

 occupations.                  • 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 or her tips

                               (no less than monthly). This could

                               include a statement prepared by the

                               employer and verified or corrected by

                               the employee.

                               • 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.

 ----------------------------------------------------------------------

 TRDA requires the employee    TRAC does not require an agreement

 to enter into a

Tipped

        between the employee and the employer.

Employee Participation

Agreement (TEPA)

 with the

 employer.

 ----------------------------------------------------------------------

 TRDA requires the employer    TRAC affects all (100%) employees.

 to get 75% of the employees

 to sign

TEPAs

 and report at

 or above the determined rate.

 ----------------------------------------------------------------------

 TRDA provides that if         TRAC provides that if the employees of

 employees fail to report at   an establishment collectively

 or above the determined       underreport their tip income, tip

 rate, the employer will       examinations may occur but only for

 provide the names of those    those employees that underreport.

 employees, their social

 security numbers, job

 classification, sales,

 hours worked, and amount

 of tips reported.

 ----------------------------------------------------------------------

 TRDA has no specific          TRAC includes a commitment by the

 education requirement.        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.

 ----------------------------------------------------------------------

 TRDA participation assures    TRAC includes the same rule.

 the employer that prior

 periods will not be examined

 as long as participants

 comply with the requirements

 under the agreement.

 ----------------------------------------------------------------------

Example of a TRAC Statement

Use the following guide to help you develop your statement to give to your employee. A TRAC statement is given to an employee showing tips attributed to him/her. This example not only fulfills the statement required for charged tips, but also for cash tip reporting and for indirectly-tipped employee reporting.

 Employer Portion

"title"

   Employee Name:             Mark Doe

   Employee Address:          123 Main Street

   City, State, Zip:          Any Town, USA 12345

   Employee SSN:              000-00-0000

   Job Category:              Food Server

   Restaurant Name:           ABC Bar & Grill

   Employer EIN:              00-0000000

   Report Period:             01/01/00-01/31/00

 Gross Sales                  $ 6,000.

                              ______________________________________

 Charged Sales w/Tips         $ 2,000.

                              ______________________________________

 Charged Tips                                              $ 280.

                              ______________________________________

 Charged Tip Rate                                14%

                              ______________________________________

 Sales Subject to Cash Tips   $ 4,000.

                              ______________________________________

Employee Portion

 Cash Tips                                                 $ 520.

                              ______________________________________

 Cash Tip Rate                                   13%

                              ______________________________________

 Tips Shared w/Others

   Name:                      Job Category:                Amount:

   _________________________________________________________________

   Johnny Noname              Busser                       $ 120.

   _________________________________________________________________

 Total                                                      (120.)

 Tips Received from Others

   Name:                      Job Category:                Amount:

   _________________________________________________________________

   Susie Cue                  Cocktail                     $ 100.

   _________________________________________________________________

 Total                                                       100.

                              ______________________________________

Net tips kept and reportable:

                             $ 780.

                              ______________________________________

 Employee Signature: ___________________________  Date: ____________

Employer fills out top portion.

 Gross Sales:

only

 include food & drink amount.

Do not

 include tax,

 tip, or nonfood/drink items.

 Charged Sales: include charged sales that show a tip on food & drink

 amounts

only

.

Do not

 include tax, tip, or nonfood/drink items. (A

 charged sale with no tip is included as a cash sale.)

Employee fills out bottom portion.

 An indirectly-tipped employee would only receive (from the employer)

 the "title" portion of statement filled out, unless employer captured

 "tips shared w/others" information from the directly-tipped

 employee's TRAC Statement and showed it as "tips received from

 others."

 Employee signs statement and gives a copy to employer, retaining a

 copy for his/her records. This statement would satisfy employer's

 requirement under the TRAC arrangement and the employee's requirement

 under the law.

How To Get Your Program Underway

How To Apply

To enter into one of the arrangements, you may call 1-800-829-4933 for the IRS Stakeholder Liaison Field office in your area. A Stakeholder Liaison can assist you with more information about the Tip Program. You may also obtain information by sending an e-mail to Tip.Program@irs.gov.

Who Should Apply

All employers with establishments where tipping is customary should review their operations. Then, if it is determined that there is or has been an underreporting of tips, the employer may apply for one of two arrangements under the TRD/EP – TRAC or TRDA.

Note: Employers currently under a TRDA, and wishing to switch to a TRAC, must first terminate their TRDA.

When to Apply

An employer may apply for either one of the two arrangements at any time. The effective date of the arrangement is determined by receipt and handling of the employer’s application.

TRDA is effective as of the date the Employment Tax Territory Manager signs the arrangement.

TRAC is generally effective as of the first day of the quarter following the date the Stakeholder Liaison Area Manager signs the agreement.

For More Information

The following is a list of IRS publications and forms relating to tip income reporting that can be downloaded from the IRS Web site at http://www.irs.ustreas.gov and can be ordered through the IRS by dialing 1-800-829-3676.

Pub 505 – Tax Withholding and Estimated Tax

Pub 531 – Reporting Tip Income

Pub 1244 – Employee’s Daily Record of Tips and Report to Employer. This publication includes Form 4070, Employee’s Report of Tips to Employer, and Form 4070A, Employee’s Daily Record of Tips.

Form 941 – Employer’s Quarterly Federal Tax Return

Form 1040ES – Estimated Tax for Individuals

Form 4137 – Social Security and Medicare Tax on Unreported Tip Income

Form 8027 – Employer’s Annual Information Return of Tip Income and Allocated Tips

Form 8846 – Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips

Form W-2 – Wage and Tax Statement; and separate Instructions for Forms W-2 and W-3