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Keeping TRAC of Tip Income: Tip Compliance

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Participating in an IRS Tip Agreement is like having an audit insurance policy.

If your business employs workers who earn a substantial portion of their income from tips (bartenders, restaurant or hotel workers, beauticians, casino employees and so on), then a tip agreement essentially provides you with immunity against an IRS audit.

The IRS established the Tip Compliance Agreement Program as a voluntary program (originally for the food and beverage industry) to encourage tax compliance and increase the frequency of reporting tip income, instead of using traditional enforcement methods such as tip examination. If your business employs workers who earn a substantial portion of their income from tips (bartenders, restaurant or hotel workers, beauticians, casino employees and so on), then a tip agreement essentially provides you with immunity against an IRS audit.

The IRS established the Tip Compliance Agreement Program as a voluntary program (originally for the food and beverage industry) to encourage tax compliance and increase the frequency of reporting tip income, instead of using traditional enforcement methods such as tip examination.

The goal of the program is to: Educate both employers and employees about federal tax laws pertaining to tips; Make it easier for tipped employees to calculate their tips, report their tips and pay their taxes; Reduce the financial burden associated with tip examination.

There are three types of tip agreements: TRDA (Tip Rate Determination Agreement) – has minimum reporting requirements determined by the IRS. TRAC (Tip Reporting Alternative Commitment) EmTRAC (Employer designed TRAC) – both TRAC and EmTRAC require the employer to provide employees with: Timely feedback showing tips presented separately as a percentage of cash and charge receipts; Tip-outs between staff and; Regular staff training on tip regulations. All three are designed to offer employers with voluntary options for complying with tip reporting laws in a non-burdensome fashion. Employers wishing to enroll in TRDA need at least 75% of their staff (100% for TRAC) to voluntarily sign up for the program. Employees should also agree to the method used in calculating the tip rate used to deduct FICA taxes. An employer entering into a Tip Agreement with the IRS has certain obligations: Maintaining Records which include: Employee records that indicate name, address, social security number, sales, tips paid out, reported tips, shifts and hours worked, occupational category Tip rate records showing all data used to establish tip rates. Furnishing information to the IRS that includes: Quarterly reports of employees Annual reports of non-participating employees

Of course this obligation presents an administrative burden of collecting, preparing, and presenting information in the required manner.

At any time, however, the employer may terminate the agreement with the IRS by providing a written notification. The IRS may also terminate the agreement with an employer if: Less than 75% of employees are participating in the agreement; The employer fails to meet any of the reporting requirements; If both parties fail to agree on a revision of tip rates.

Employers in the service sector should consider a voluntary tip agreement as a method of enhancing tax compliance among their tipped employees while at the same time enjoying the benefits of IRS audit exemption.