February 6, 2023
The IRS today announced a proposed update to employer tip reporting requirements. The new Service Industry Tip Compliance Agreement (SITCA) program outlined in Notice 2023-13 would replace three current IRS tip compliance programs for non-gaming service industries:
The programs are important in service industries because the IRS can assess FICA tax liability on employers for employee underreporting tips under some circumstances via Code Section 3121(q). The programs protect participating employers from such assessments.
Notice 2023-13 sets out eligibility requirements for the new program:
The proposed revenue procedure sets forth requirements for an employer to participate in the SITCA program. An eligible employer, called a “Service Industry Employer,” is generally an employer (excluding gaming industry employers) that (1) is in a service industry where employees perform services for customers and those services generate sales that are subject to tipping by customers, (2) has at least one Covered Establishment, and (3) is compliant with Federal, state, and local tax laws for the three completed calendar years immediately preceding the date the application is filed (the preceding period), plus the calendar quarters following the end of the preceding period through any calendar quarters during which the Service Industry Employer’s application is pending for some or all of the quarter. After acceptance, Service Industry Employers must continue to satisfy these requirements to continue participating in the SITCA program.
The proposed revenue procedure also sets forth the requirements for each Covered Establishment to participate in the SITCA program. A Covered Establishment must have tipped employees who utilize a technology-based time and attendance system to report tips under section 6053(a). Each Covered Establishment must also utilize a POS System to record all sales subject to tipping, and that POS System must accept the same forms of electronic payment for tips as it does for sales
The Notice includes a proposed revenue procedure:
The proposed revenue procedure requires Service Industry Employers to demonstrate compliance with the SITCA program by submitting an annual report on behalf of each Covered Establishment after the close of the calendar year. If the Service Industry Employer cannot establish that a Covered Establishment satisfied the minimum reported tips requirements in its annual report, the Service Industry Employer will not receive protection from liability under section 3121(q) with respect to that Covered Establishment for the calendar year to which the annual report applies and that Covered Establishment will be removed from the SITCA program.
According to the IRS, the proposed new program "is designed to take advantage of advancements in point-of-sale, time and attendance systems, and electronic payment settlement methods to improve tip reporting compliance. The proposed program would also decrease taxpayer and IRS administrative burdens and provide more transparency and certainty to taxpayers."
The Notice requests comments on three issues:
How a technology-based time and attendance system may be used by tipped employees to report tips, including tips in cash and other forms of tipping made through electronic payments methods (other than a credit card), regardless of whether the tips are received directly from customers or through tip sharing arrangements;
How tip sharing practices vary across service industries and how the SITCA program can support employer participation while accommodating potential differences in Federal, state, and local labor and employment law requirements;
How employers of large food or beverage establishments participating in the SITCA program may meet their filing and reporting obligations under section 6053(c) and also satisfy the SITCA program requirements for compliance, while minimizing the administrative burdens on taxpayers and the IRS.
The SITCA program would take effect when the proposed Revenue Procedure is published in final form, Comments are requested by May 7, 2023.
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