Out of all the federal agencies, the IRS traditionally ranks among the lowest in public support.
But a recent move has spurred Sen. Ted Cruz to go so far as to accuse the tax agency of “next level cruelty.”
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The IRS announced a proposed new tip reporting program, Service Industry Tip Compliance Agreement (SITCA) on Feb. 6. It would be a voluntary tip reporting program between the IRS and employers in various service industries and could result in service workers seeing their tax liability go up.
The program is intended to improve gratuity reporting compliance and reduce the estimated $1.66 billion in annual unreported tip income.
SITCA is open for public comment until early May — but has already drawn the ire of Republican lawmakers, who see the proposed program as a prime example of how the IRS is “punishing everyday Americans.”
How the new tipping program would work
SITCA would be a voluntary program for employers in all service industries (apart from the gaming sector) with at least one business location.
It has been designed to take advantage of changes in how we tip and how employers monitor and report those tips to the IRS — with the aim of improving compliance and reducing unreported tip income.
Today, most tips are applied at the point-of-sale, when you’ll be prompted to add a percentage on top before entering your PIN or signing the credit card slip to pay.
From there, employers that participate in SITCA would give the IRS an annual report of their electronic tip information and an estimation of cash tips. Those employees collecting tips wouldn’t have to do anything to report their income, which the IRS hopes will “decrease taxpayer administrative burden.”
What’s different about SITCA?
The IRS already has two tip reporting programs that SITCA aims to replace, explains Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting.
The Tip Rate Determination Agreement (TRDA) allows the IRS and employers to agree on selected tip rates for different categories of employees, while the Tip Reporting Alternative Commitment (TRAC), has employers prepare a monthly report on tip income based on disclosures from employees who receive cash tips.
Luscombe says the IRS appears to be trying to sell employers on SITCA by simplifying “the burden of employer reporting.”
And as for employees, he adds the tax agency is quick to point out that more accurate reporting of their tip income translates into an increase in their reported income — “which will help with retirement contributions, Social Security and Medicare contributions, and increase their eligibility for mortgage loans.”
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Of course the crux of that is when reported income is higher, that often translates into a higher income tax.
That seemingly punitive outcome has enraged SITCA’s critics — especially after President Biden has promised not to raise taxes on those making less than $400,000 or to increase audit rates above historical levels for those making less than $400,000.
But Mike Palicz, the federal affairs manager at Americans for Tax Reform, couldn’t help but link the tip reporting announcement with the Biden administration’s plans to beef up the IRS’s ranks with thousands of new hires.
“Those 87,000 new IRS agents that you were promised would only target the rich… They're coming after waitresses' tips now,” Palicz tweeted the day after the announcement.
Meanwhile, Rep. Thomas Massie tweeted: “Stop the presses. No need to raise the debt limit. Biden is going after those billionaire waitresses’ tips.”
For its part, the Biden administration says it’s not raising taxes on servers, it’s simply trying to collect taxes that are already owed.
SITCA is open for public feedback until May 7. If the program is implemented, servers may find they have less control over their reported tip income — and their tax bill may increase too.
Properly reporting tips has long been an issue for tipped workers, according to Tom O’Saben, director of tax content & government relations at the National Association of Tax Professionals.
“In some cases, employers completely ignore tips and place the responsibility on the workers, who often don’t report the income and face potential IRS scrutiny and penalty should an audit discover unreported income,” said O’Saben.
On the other extreme, some employers require employees to report their tips at the end of each shift so they can pool the tips to cover Social Security and Medicare payroll requirements. But since many employers allocate tips based on a percentage calculation for their type of industry — typically 8%, says O’Saben — that can mean employers may report too little or too much for any given employee.
“In other words, this situation is at the other end of the spectrum where workers may be paying tax on money they never received,” says O’Saben.
To find a happy medium between underreporting and overreporting their tips, O’Saben says it’s on employees to educate themselves about their responsibility to report. And while tips might seem like free money at the moment, they are taxable income in the government’s eyes.
(Unless of course your tips amount to less than $20 in a month.)
If you’re unsure how to handle reporting your tip income, O’Saben recommends speaking with your prospective employer about how tips are treated there and what interaction there will be between the two of you.
It might also be helpful to keep a log of your tips on your own. The IRS provides a form, but there are also apps like TipSee that can make that easier. If the actual tips you receive are less than those allocated by your employer, you might not receive a deduction, but you also won’t be on the hook for any further reporting.
Finally, if your income exceeds what your employer reported, you’ll have to complete another form for the agency.
“As electronic tracking means become more mainstream, good record keeping becomes even more essential than it has been in the past to defend yourself in the event of IRS inquiry,” O’Saben adds. Without good records, you’re at the mercy of the employer, the IRS, or both, when it comes to the amount of tip income you must report and pay tax on.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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