TOP DRAWER ARTICLE

Tip Reporting
by
HL Carpenter

The March 19, 2011 issue of Top Drawer Ink included an article titled "The History of Tipping" [click here], and ended with the line: tips are income, and are subject to tax.

If you're the owner of a business and your employees receive tips of $20 a month or more, you know that's a simple wrap-up of a complicated issue. That's one reason you may want to participate in voluntary tip reporting and compliance programs established by the IRS. While one program, the Attributed Tip Income Program, ends on December 31, 2011, two others are still available.

1. Tip Reporting Alternative Commitment (TRAC). TRAC focuses on educating your employees. You're required to produce a monthly statement showing the tips received and distribute it to each tipped employee. Also required: A quarterly education program - set up by you - to advise all current and new employees of proper tip reporting procedure.

2. Tip Rate Determination Agreement (TRDA). TRDA is a signed agreement between you and the IRS that establishes a tip rate for your employees. You can calculate different rates for different jobs, and at least 75% of your employees must report their tips at or over the determined rate.

You'll have to keep records for either program, and some tax reporting is required in addition to your regular quarterly and annual payroll returns. On the plus side, as long as you honor your agreement with the IRS, you may be able to avoid audits for underreported tips while participating in the program of your choice.

Originally published November 2011.

Last update: November 19, 2011