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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The Program of Tip Reporting
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.
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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