- The IRS has proposed a voluntary, point-of-sale tip reporting program for service industry employers that could help them avoid compliance reviews, the agency announced Feb. 6. It would include “monitoring of employer compliance based on actual annual tip revenue and charge tip data from an employer’s point-of-sale system.”
- The Service Industry Tip Compliance Agreement is designed to take advantage of technology advances in point-of-sale and time and attendance systems, which can be used to track and improve tip reporting, an IRS synopsis explained. The SITCA would replace three existing compliance programs available to service industry employers that have continued largely unchanged since the 2000s, the agency said.
- To demonstrate compliance with the SITCA and reduce the need for an IRS review, participating employers would have to submit an annual report at the close of the calendar year, according to the announcement. Employers that comply with the SITCA would receive protection from liability under IRS rules that define tips as part of an employee’s pay, the announcement said. Employers may comment until May 7.
Employee tips are mostly governed by the rules of two federal laws: the Fair Labor Standards Act and the IRS Tax Code.
The FLSA generally requires employers to let workers retain tips. It also allows employers to consider tips as part of a worker’s wages so long as an employer doesn’t pay the worker less than $2.13 an hour in direct wages, and this amount, together with the amount of tips the worker receives, is enough to meet the federal minimum wage ($7.25 an hour), a U.S. Department of Labor, Wage and Hour Division, fact sheet states.
Employees sometimes pool their tips, but over the past few years, DOL rules regarding tip pools and dual work (where employees perform tipped and nontipped work) have been in flux. In 2021, the DOL issued a series of rules clarifying these practices.
First, in April 2021, DOL formally continued a Trump-era regulation prohibiting managers and supervisors from keeping tips. However, in September 2021, the agency clarified that managers and supervisors can keep tips they receive for services they “directly and solely provide.” They can also contribute to tip pools. In addition, employers that pay the full minimum wage and take no tip credit can allow nontipped employees, such as cooks and dishwashers, to participate in a tip pool.
In October 2021, DOL clarified the “80/20” rule for tipped employees who perform dual roles: Tip credits are not available if the tipped employee performs nontipped work for more than 20% of their workweek hours, or for a continuous period of 30 minutes.
Per the IRS, cash and noncash tips are income and subject to federal income taxes. Cash tips are subject to Social Security and Medicare taxes as well and must be reported to the employer.
Employers are then required to withhold taxes (including income taxes and the employee’s share of Social Security tax and Medicare tax) based on wages and tip income the employee receives, an IRS guidance explains. Employers must also pay their share of Social Security and Medicare taxes based on the total wages paid to tipped employees and their reported tip income.