If you’re in the service industry, you know the struggle to track your employees’ cash tips. It’s always a surprise when the IRS comes knocking on your door with an assessment of your share on FICA taxes for unreported tips.
Thus, despite their voluntariness, service industry employers are inclined to participate in the Internal Revenue Service’s (IRS) tip reporting programs such as the Tip Rate Determination Agreement (TRDA), Tip Reporting Alternative Commitment (TRAC), and Employer designed TRAC (EmTRAC). These programs ensure employers will not be liable for employer share in FICA taxes on tips that employees failed to report (Section 3121(q) liability).
Recently, the IRS issued Notice 2023-13 introducing the proposed Service Industry Tip Compliance Agreement (SITCA) program, slated to be the sole tip reporting compliance program, replacing the TRDA, TRAC, and EmTrac.
What Is The SITCA Program?
The SITCA program aims to simplify the process of tip reporting and lessen the IRS and taxpayers’ administrative burden by leveraging the advancements in point-of-sale (POS) systems, time and attendance software, and electronic payment settlement methods.
Under the proposed program, employer compliance is monitored based on actual annual tip revenue, charge tip data from an employer’s point-of-sale system, and allowance for adjustments in tipping practices from year to year. Meanwhile, employers can submit an annual report after the close of the calendar year to reduce the need for compliance reviews.
Who Are Service Industry Employers?
The program is available to employers of all service industries, except the gaming industry, which has the Gaming Industry Tip Compliance Agreement (GITCA) program.
As provided under the Notice, to be considered a service industry employer eligible to participate, you must:
- Be in a service industry where employees perform services for customers, and those services generate sales that are subject to tipping by customers;
- Have at least one “covered establishment”; and
- Have complied with Federal, State, and local tax laws for three completed calendar years immediately preceding the date of application, as well as the calendar quarters following the end of the three years through any calendar quarters during which the service industry employer’s application is pending for some or all of the quarter.
What Is A “Covered Establishment?”
A covered establishment is one that:
- Employs tipped employees utilizing a technology-based time and attendance system to report tips under section 6053(a); and
- Makes use of a POS system to record all sales subject to tipping, which must accept the same forms of electronic payment for tips as it does for sales.
What the SITCA means for employers in the service industry
- It provides protection from Section 3121(q) liability.
Like the TRDA, TRAC, and EmTRAC, employers accepted to the SITCA program will be afforded protection from liability under Section 3121(q), which authorizes the IRS to assess and collect employer share on FICA taxes for unreported tips.
- It eliminates employee participation and tip examination protection.
The SITCA differs from the TRDA and GITCA in that the proposed program does not require employees to sign participation agreements to be exempted from their employers’ compliance monitoring.
This new feature promotes a sound tax administration as it eliminates the provision of tip examination protection without a measurable form of tip reporting compliance. Moreover, service industry employers will have the flexibility to adopt and implement policies and procedures to ensure compliance and accurate reporting of tips from employees.
- It imposes the automatic removal of a noncompliant establishment.
Finally, covered establishments that fail to meet SITCA’s minimum reported tip requirement in its annual report shall be automatically removed from the program.
Call for Public Comments
Do you have insights or comments on the specific issues raised by the IRS in the proposed guidance on the Service Industry Tip Compliance Agreement (SITCA) program? You have until May 7, 2023, to submit them by mail or electronically to the IRS.
With this much time, you can reach out to your most trusted tax professional to learn more about how the SITCA program may affect or benefit you, check any potential issues and challenges with the current proposal, or even have someone go over your concerns and comments.
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