SITCA - The IRS's New Tip Reporting Program
Last week the IRS announced the proposal of a new revenue procedure that would affect businesses whom have employees that receive tips. The Service Industry Tip Compliance Agreement or SITCA, is a voluntary tip reporting program between the IRS and various service industry businesses.
Huge advancements have been made within tipping culture as well as POS systems. Technology within the service industry is advancing, meaning the IRS is considering new ways for employers and their employees to keep track and report on revenue being made from tips.
“The proposed SITCA 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 program would also decrease taxpayer and IRS administrative burdens and provide more transparency and certainty to taxpayers.” according to the IRS notice.
SITCA Makes Tip Reporting Simpler For You
IRS jargon can be confusing and the announcement of this new proposed program might sound alarming to both business owners and their employees.
The overall goal of the SITCA program is to actually simplify tip reporting and replace the three other programs already in place. The Tip Rate Determination Agreement (TRDA), Tip Reporting Alternative Commitment (TRAC), and Employer designed TRAC (EmTRAC) are the programs that employers already need to be conscious of during tax season.
The SITCA is a voluntary program that employers may choose whether or not they want to participate in. The program would be available to service industry employers (excluding the gaming industry) with at least one business location conducting as a “covered establishment.”
A covered establishment is a place of business where tipped employees use a technology-based time and attendance system to report tips. Nowadays, the majority of well-established businesses use some sort of POS system that records all sales subject to tipping and accepts the same forms of payment for tips as it does sales. Which is why the IRS is proposing this new program.
How Does Joining the SITCA Tip Reporting Program Benefit My Business?
The proposed program includes a variety of features, which include:
- "Employers that choose to participate reduce the need for compliance reviews by the IRS. By submitting an annual report after the close of the calendar year, employers demonstrate compliance with the program requirements.
- In the years employers remain compliant with the program requirements, they will receive protection from liability under the rules that define tips as part of an employee’s pay.
- Flexibility to fulfill employee tip reporting policies that are best fitting for their employees and business model. As long as participating employers are in agreement with the section of the tax law that requires employees to report tips to their employers.
- The monitoring of employer compliance makes allowances for changes in tipping practices from year to year, based on real annual tip revenue and charge tip data from and employer’s point-of-sale system."
For an employer to fully participate in SITCA, they must perform a self-audit of their payroll and tip practices and make any necessary corrections. After this they must agree to future compliance with the law. By doing this, the Department of Labor will waive any potential civil monetary penalties that may have been determined.
According to the proposed revenue procedure, any existing agreements would remain in effect until; the employer fully participates in the SITCA program and the IRS determines that an employer no longer complies to the terms of their TRDA, TRAC, or EmTRAC agreement. As well as the final revenue procedure being published in the Internal Revenue Bulletin after the first full calendar year.
What Counts as a Tip According to the IRS?
With all of these programs already in place and the new SITCA program being proposed, it's important to know what counts as a tip. The IRS has four elements that determine whether or not a payment is considered a tip:
- The payment is not required.
- The amount is fully decided by the customer.
- The employers do not control the payment.
- The customer decides who gets the payment.
If the payment falls under all four of these requirements, it is considered a tip and will need to be accounted for when tax season rolls around. This is not a new practice, employees that receive tips are already required to report tips to the IRS that exceed $20 per month.
Since tipping culture has morphed in the recent years, making $20 a month is easily attained. Since point-of-sale technology is continually advancing and most people don’t carry as much cash, the days of the honor system when reporting cash tips has dwindled. This is another reason why the IRS feels the need to update their tip reporting program.
Prepare for Tax Season
If an employer chooses to enroll in SITCA, they must maintain accurate tip reporting throughout their participation. If the employer is deemed non-compliant with the program the penalty can be substantial. Employers may find themselves automatically removed from SITCA and will be prevented from re-enrolling for the next three years. This may cause employers to make sure their employees are accurately claiming their tips more intensely then they did in past years.
The pressure of tax season is in full effect for business owners. Don’t let the announcement of new programs stress you out. SITCA is still in its early stages and the IRS encourages people considering the program to weigh in on it and provide comments and feedback.
Make sure you fully understand the program and confirm that it’s right for your business before enrolling.
If you would like to learn how to future proof your business, check out some of our POS Systems that comply with the new SITCA program and programs to come.