Service Industry Tip Compliance Agreement (SITCA), a new planned tip reporting procedure, was made public by the IRS last month.
Service workers’ tax obligations may increase as a result of the voluntary tip reporting program between the IRS and employers in different service businesses. The program aims to decrease the estimated $1.66 billion in yearly unreported tip money and increase compliance with gratuity reporting.
What Is Service Industry Tip Compliance Agreement?
Tens of billions of dollars in taxes are at risk because, according to a 2018 research by the Treasury Inspector General for Tax Administration, 30% of businesses with tip agreements fail to declare earnings.
Employers in all service industries (apart from the casino industry) with at least one business location would be able to participate in SITCA on a voluntary basis.
It has been designed to take advantage of changes in how we tip and how employers monitor and reports those tips to the IRS — with the aim of improving compliance and reducing unreported tip income.
Most tips are now given at the point of sale when you will be asked to do so before paying with a credit card or entering your PIN. From there, SITCA-compliant businesses would submit a yearly report to the IRS that included estimates of cash tips as well as details on their electronic tip information.
The IRS anticipates that the elimination of income reporting requirements for those workers who receive tips will reduce taxpayer administrative burden. SITCA seeks to replace two existing tip reporting initiatives from the IRS, according to Mark Luscombe, the principal analyst at Wolters Kluwer Tax & Accounting.
While the Tip Reporting Alternative Commitment (TRAC) requires employers to compile a monthly report on tip income, the Tip Rate Determination Agreement (TRDA) enables the IRS and employers to agree on specific tip rates for certain groups of employees.
SITCA Could Replace Existing Programs
The voluntary SITCA program suggested by the IRS’s National Tip Reporting Compliance Program, a unit of the Small Business/Self-Employed Division, is described in Notice 2023-13’s proposed revenue procedure.
All employers in the service industries, with the exception of those in the casino sector, would have access to the SITCA program. The suggested plan would
- Agreements governing tipping rates (TRDAs)
- Advice on disclosing alternative commitments (TRACs)
- Alternative commitments for tip reporting created by the employer (EmTRACs)
Employers who wish to take part in the SITCA program must operate at least one “covered establishment,” also known as a business location, under their employer identification number (EIN).