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IRS Proposes Changing How Tips Are Reported for Service Industry Employees

New IRS proposal would create one voluntary compliance agreement

The IRS has proposed a new voluntary tip reporting program that would be aimed at service industry workers such as servers to increase compliance with tip reporting requirements.

Currently, employees who earn at least $20 a month in tips must keep detailed records of those tips and any associated income is required to be reported on their tax returns. Employers are also responsible for withholding taxes on income earned from tips.

At present, certain industries that rely heavily on tipping have established three different voluntary compliance agreements with the IRS: TRAC (Tip Reporting Alternative Commitment), TRDA (Tip Rate Determination Agreement), and GITCA (Gaming Industry Tip Compliance Agreement). Now, the IRS has proposed an additional one-stop shop for all service industry workers with one single agreement – the Service Industry Tip Compliance Agreement.

This proposed program includes several features that should make it easier for employers to comply with tax law requirements surrounding tip reporting: monitoring compliance based on annual tip revenue and charge data from point-of-sale systems; participants submitting an annual report after the close of each calendar year to reduce compliance reviews by the IRS; protection from liability if compliant during applicable calendar years; and flexibility to implement employee-friendly policies around tip reporting rules. 

The current system requires employees to be aware of how much they are reporting in tips on their income taxes. Many people are unaware that this is even required and may not be able to accurately report their tip income appropriately. The proposed changes aim to make the process simpler by introducing payroll-based reporting, which would allow employers to use their existing payroll systems to easily track their employees’ tip earnings.

The changes could also benefit customers by providing them with greater transparency into how their tips are being handled and utilized by businesses. With current regulations, employers are allowed to keep up to 8% of an employee’s tips as a sharing fee, meaning that less money than expected is actually provided directly to an employee. Under new rules proposed by the IRS, this practice may become more closely monitored or regulated as part of any change in policy.

For service industry employees, these potential changes come with both pros and cons. On one hand, it would create a clearer system for wages that may be more accurate and easier to follow for everyone involved. On the other hand, it could leave employers with more control over tip income made by employees, potentially reducing what workers take home at the end of shifts as businesses adjust to any new policies or fees required under revised regulations.

The move comes as the IRS has increased hiring efforts even though the agency noted they will not be conducting additional audits on Americans making less than $400,000 annually. In total, the IRS has hired 87,000 new employees since the start of the pandemic.

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