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IRS Releases Publication 3144 (3/2015), Tips on Tips: A Guide to Tip Income Reporting for Employers in Businesses Where Tip Income is Customary


Publication 3144 (3/2015)

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Citations: Publication 3144 (3/2015)

The Program of Tip Reporting

 

How To Get Your Program Underway

 

Example of a TRAC Statement

 

Forms and Publications

If you are an employer of an employee who receives tip income, this guide is for you.

The Internal Revenue Service (IRS) began its Tip Rate Determination/Education Program (TRD/EP) in October 1993 for businesses where tip income is customary. 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?

 

• Tip Rate Determination Agreement (TRDA)

• Tip Reporting Alternative Commitment (TRAC)

• Institute your own reporting system to comply with the tax law.

 

Under the Tip Rate Determination/ Education Program (TRD/EP), the employer may enter into a TRDA or a TRAC arrangement, depending on the specific business. The IRS will assist applicants in understanding and meeting the requirements for participation. The next pages show how these two arrangements differ.

How does the program benefit my employees?

There are a number of reasons why an employee should report all of his/her tip income:

 

• Increased income may improve financial approval when applying for mortgage, car, and other loans

• Increased social security and Medicare benefits (the more you pay, the greater the benefits)

• Increased unemployment compensation benefits

• Increased employee pension, annuity, or 401(k) participation (if applicable)

• Increased workers' compensation benefits, should your employees get hurt on the job

 

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

Currently, the IRS is offering participation in TRD/EP to employers in the food and beverage, hairstyling, and gaming (casino) industries. There are now new agreements to accommodate every tipping industry.

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 the two arrangements (depending on their specific business) under the TRD/EP-TRDA, 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 one of the two arrangements, depending on his/ her specific business, 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 IRS 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.

TRDA vs. TRAC (how they differ)

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 TRDA                                 TRAC

 

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

 

 with the establishment to arrive at  rate be established but it does

 

 a tip rate for the establishment's   require the employer to:

 

 various 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 to        TRAC does not require an

 

 enter into a Tipped Employee         agreement between the

 

 Participation Agreement (TEPA)       employee and employer.

 

 with the employer.

 

 TRDA requires the employer to        TRAC affects all (100%)

 

 get 75% of the employees to sign     employees.

 

 TEPAs and report at or above the

 

 determined rate.

 

 TRDA provides that if employees      TRAC provides that if the

 

 fail to report at or above the       employees of an establishment

 

 determined rate, the employer        collectively underreport their

 

 will provide the names of those      tip income, tip examinations may

 

 employees, their social security     occur but only for those

 

 numbers, job classification, sales,  employees that underreport.

 

 hours worked, and amount of tips

 

 reported.

 

 TRDA has no specific education       TRAC includes a commitment

 

 requirement.                         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.

 

 TRDA participation assures the       TRAC includes the same rule.

 

 employer that prior periods will

 

 not be examined as long as

 

 participants comply with the

 

 requirements under the agreement.

 

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Example of a TRAC Statement

Use the following "example" to help you develop your statement for your specific business, and provide a copy to your employees. (The following example is designed specifically for employees in the food and beverage industry.) 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.

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 "title"  Employer Portion                              Employer fills

 

          Employer Name:        Mark Doe                out top

 

          Employee Address:     123 Main Street         portion.

 

          City, State, Zip:     Any Town, USA 12345  

 

          Employee SSN:         000-00-000              Gross Sales:

 

          Job Category:         Food Serve              only include

 

          Establishment Name:   ABC Bar & Grill         food & drink

 

          Employer EIN:         00-0000000              amount. Do not

 

          Report Period:        01/01/00 - 01/31/00     include tax,

 

                                                        tip, or

 

          Gross Sales:          $6000                   non-food/drink

 

          Charged Sales w/Tips  $2,000                  items.

 

          Charged Tips:                           $280

 

          Charged Tip Rate             14%              Charged Sales:

 

          Sales Subject to                              include charged

 

          Cast tips             $4000                   sales that show

 

                                                        a tip on food &

 

                                                        drink amounts

 

                                                        only. Do not

 

                                                        include tax,

 

                                                        tip or

 

                                                        non-food/drink

 

                                                        items.

 

                                                        (A charged sale

 

                                                        with no tip is

 

                                                        included as a

 

                                                        cash sale.)

 

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          Employee Portion                              Employee fills

 

          Cash Tips                               $520  out top

 

          Cash Tip Rate                13%              portion.

 

          Tips Shared w/Others                          An indirectly-

 

                            Job                         tipped employee

 

          Name:             Category:  Amount:          would only

 

          Johnny Noname     Busser     $120             receive (from

 

          Total                        (120)            the employer)

 

                                                        the "title"

 

          Tips Recieved from Others                     portion of the

 

                            Job                         statement

 

          Name:             Category   Amount           filled out,

 

          Susie Cue         Cocktail   $100             unless employer

 

          Total                         100             captured "tips

 

                                                        shared

 

          Net tips kept and                             w/others

 

          reportable:                  $780             "information

 

                                                        from the

 

          Employee Signature:  Mark Doe  Date: 3/23/15  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.

 

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Forms and Publications

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. (TTY/TDD equipment access, dial 1-800-829-4059).

Publication 505 -- Tax Withholding and Estimated Tax

Publication 531 -- Reporting Tip Income

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

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