Have you heard about the Service Industry Tip Compliance Agreement program, otherwise known as SITCA?
On February 6, the IRS released a proposed revenue procedure—Notice 2023-13—establishing SITCA. Learn what it is and why it matters to service industry employers.
Background: Tip reporting
If you’re an employer in the service industry, you likely have tipped employees, such as restaurant servers, hairstylists, or baristas.
When you have tipped employees, you’re responsible for collecting tip information (i.e., how much they received in tips). Tip payments include:
- Cash tips directly from customers
- Electronic tip payments (e.g., credit cards)
- Tips from tip-sharing arrangements
You must then report tip payments and other wages on employment tax returns. Large food or beverage establishments must also report total business tips on Form 8027.
Your ability to accurately report tipped income to the IRS depends on your tipped employees’ ability to report their tipped income to you.
To promote tip reporting compliance by employees, the IRS offers voluntary tip reporting programs. These programs establish an agreement between the IRS and the participating employer. There are three tip reporting programs: TRAC, TRDA, and EmTRAC.
What are the TRAC, TRDA, and EmTRAC programs?
TRAC, TRDA, and EmTRAC are voluntary agreements between the IRS and an employer. The agreements aim to promote employee tip reporting compliance. In exchange, the IRS provides tip income audit protection for compliant employers and employees (i.e., the IRS won’t challenge reported tips).
Take a look at the three programs:
- Tip Reporting Alternative Commitment (TRAC): TRAC is an agreement that emphasizes education and tip reporting procedures. Employers can use this agreement if they’re in the food and beverage industries and have tipped employees who receive cash and charged tips.
- Tip Rate Determination Agreement (TRDA): TRAD requires the determination of tip rates and is used in the food and beverage industry.
- Employer-Designed Tip Reporting Program (EmTRAC): Like the TRAC agreement, EmTRAC is only available to employers in the food and beverage industry with employees who receive cash and charged tips. The EmTRAC program also allows employers to design their own educational program and tip reporting procedures or combine them (e.g., through a point-of-sale system).
If you have tipped employees and don’t join an IRS tip reporting program, you risk underreporting employee tips. This could subject you to IRS audits and penalties (if applicable).
What is SITCA?
The Service Industry Tip Compliance Agreement (SITCA) program is a voluntary tip reporting program for service industry employers (excluding gaming industry employers). The IRS intends to replace the three existing tip reporting programs—TRAC, TRDA, and EmTRAC—with SITCA.
SITCA aims to:
- Take advantage of new technologies (i.e., POS systems, time and attendance systems, and electronic payment settlement methods)
- Increase tip reporting compliance
- Decrease taxpayer and IRS administrative burden
What is SITCA’s purpose?
The SITCA program’s ultimate goal is to increase tip reporting compliance.
In 2018, the Treasury Inspector General for Tax Administration (TIGTA, another acronym!) highlighted some issues with the existing tip reporting agreements—particularly the tip income audit protection. TIGTA found that businesses with tip agreements had projected unreported tips of nearly $1.66 billion the IRS couldn’t challenge. Although the IRS could revoke any of the TRAC, TRDA, or EmTRAC agreements if an employer didn’t comply, the TIGTA found that the IRS rarely did.
Thus, the Service Industry Tip Compliance Agreement program was born. According to the IRS, SITCA:
- Eliminates employee participation and the corresponding employee tip income audit protection
- Requires employers with an agreement to submit an annual report demonstrating compliance with the program
- Provides for automatic removal if a business fails to satisfy SITCA’s minimum reported tip requirement in its annual report.
- Does not require any tax reporting commitment from employees
- Does not require employers to provide educational or training programs to employees like in the TRAC program
- Requires that employers use a POS system to record all sales subject to tipping
Like previous tip reporting programs, SITCA provides qualifying employers with protection from liability.
The IRS hopes that the stricter SITCA guidelines will give employers an incentive to implement tip reporting procedures, as well as train and educate employees.
What happens to existing tip reporting agreements?
Let’s say you already have a TRDA with the IRS. What happens?
According to the IRS, employers with existing tip reporting agreements will have a transition period. During this time, existing tip reporting agreements will still be in effect.
The transition period (i.e., going from your existing agreement to SITCA) ends when one of the following happens, whichever comes first:
- You are accepted into the SITCA program
- The IRS determines that you’re not compliant with the terms of your TRDA, TRAC, or EmTRAC agreement
- The end of the first calendar year after the Internal Revenue Bulletin publishes the final revenue procedure
Who is eligible for the SITCA program?
SITCA is available to employers who:
- Are in a service industry where employees perform services for customers that generate sales that are subject to tips
- Are not gaming industry employers
- Have at least one business location that operates under their Employer Identification Number (EIN)
- Require tipped employees to use a technology-based time and attendance system to report tips
- Use a POS system to record all sales subject to tipping (and the POS system must accept the same forms of electronic payment for both tips and sales)
- Are compliant with federal, state, and local tax laws for the three full calendar years immediately before the date the application is completed, plus all preceding and in-progress calendar quarters during which the application is pending
If you get accepted into the program, congratulations! But the work doesn’t stop there. You must continue to satisfy these IRS requirements to stay in the SITCA program.
Not a fan? Or, have ideas for improving SITCA?
Individuals can submit feedback to the IRS until May 7, 2023, either electronically or by mail.
The IRS especially wants to hear your comments relating to how:
- Tipped employees can use technology-based time and attendance systems to report all tips (e.g., tips directly from customers or through tip-sharing arrangements)
- Tip-sharing practices vary across service industries and how SITCA program can support employer participation and accommodate federal, state, and local law requirements
- Employers of large food or beverage establishments can meet their filing and reporting obligations and satisfy SITCA program requirements while minimizing administrative burdens
For more information, along with instructions for submitting comments, check out IRS Notice 2023-13.
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This is not intended as legal advice; for more information, please click here.