IRS Proposes New Tip-Reporting Program for Service Industries

Tip jar full of coins on counterEarly in February, the IRS introduced a proposed change to tip reporting for service-based industries. This proposal would establish a new program known as the Service Industry Tip Compliance Agreement (SITCA) program, a voluntary tip-reporting program between employers and the IRS. If your business falls into a service-based industry where employees frequently receive tips, it’s important to learn about the proposed SITCA program and how you can provide feedback on this new method of tip reporting for employers.

What Is the SITCA Program?

As we stated above, the SITCA program would be used as a new method of tip reporting for employers. It’s designed to take advantage of improvements in point-of-sale systems, time tracking, and attendance software, as well as advancements in electronic payment methods in order to improve tip-reporting compliance for employers. Additionally, this new program would decrease the administrative burdens on both the taxpayer and the IRS while providing improved transparency and greater confidence regarding the accuracy of the reported tips.

Ultimately, the goal of the SITCA program is to replace all existing tip-reporting compliance programs for employers throughout various service industries, including the following:

  • Tip Rate Determination Agreement (TRDA)
  • Tip Reporting Alternative Commitment (TRAC)
  • Employer-design Tip Reporting Alternative Commitment (EmTRAC)

However, note that the SITCA program would not impact the gaming industry or the existing Gaming Industry Tip Compliance Agreement (GITCA) program. The IRS is continuing to explore other options for simplifying tip reporting in that industry for the time being.

What Are the Features of the SITCA Program?

So, you know what the goal of the SITCA program is, but what does this new program entail, exactly? How will it change the way you report your business’s tips on your taxes? The proposed tip-reporting program includes many different features, such as:

  • Monitoring employer compliance based on actual annual tip revenue and data on charged tips from the employer’s point-of-sale system.
  • Allowance for adjustments in tipping practices each year
  • Employers must submit an annual report at the end of the calendar year to demonstrate compliance with the program’s requirements, thereby reducing the need for compliance review by the IRS.
  • Employers receive liability protection under rules defining tips as a part of an employee’s pay for years in which they remain compliance with the SITCA program’s requirements.
  • Employers maintain the flexibility to implement employee tip-reporting policies that work best for their employees and their business model, so long as they remain in accordance with tax laws requiring employees to report their tips to their employers

Utilizing point-of-sale systems and providing employers with protections and flexibility in their tip-reporting policies will likely make the SITCA program highly appealing to many employers in the service industry. However, if the SITCA program doesn’t appeal to you, don’t worry just yet; this is still only a proposed tax law change and it is unclear if and when this program will be put into effect.

What If I Disagree with the SITCA Program’s Changes?

If you’re concerned about some of the proposed changes and features of the SITCA program, there’s good news: The IRS is currently only issuing this guidance as a proposal so that the public has an opportunity to comment and provide feedback on the proposed changes. If you’re interested in providing feedback on the proposed program, follow the instructions included on the IRS’s notice issued last month, Notice 2023-13. Reading through this entire notice will also provide you with additional details pertaining to the SITCA program so you can provide informed feedback and comments.

You can submit your comments via mail or electronically through the Federal eRulemaking Portal. All comments must be received by May 7th, so ensure that you provide your feedback by this deadline if you hope to have it reviewed.

If the SITCA program is signed into law, any existing tip-reporting agreements for your business would remain in effect until one of the following occurs:

  1. You choose to accept the SITCA program;
  2. The IRS determines your business is not compliant with the terms of your existing tip-reporting agreement; or
  3. The end of the first full calendar year after the finalized procedure is published in the Internal Revenue Bulletin.

We understand that staying abreast of tax law changes that impact your business is extremely difficult. If you have questions about the SITCA program or other current or proposed changes to business taxes, contact Demian & Company today to speak with one of our CPAs. We’ll provide you with the information you need and ensure you’re ready to file your business tax return when the time comes.