SITCA: How to Navigate the IRS’s New Tip Reporting Program

Three things in life are certain: death, taxes, and confusing updates from the IRS. 

This year, the IRS has rolled out a new tip reporting program that should help restaurant owners use technology to stay in compliance with tax laws — once we’re all on the same page as to how it works. Here’s a quick rundown of the new program and what it means for employers. 

How do employers typically handle taxes on tips? 

Most of the burden of tip reporting falls on the employee. They’re responsible for keeping a daily record of tips, reporting tips to their employers, and reporting their tips on their tax returns. And while tips aren’t wages, employers do still have a hand in reporting tips and withholding taxes. 

Did you know that even though tips aren’t wages, you still have to pay your share of income taxes on them? That’s why it’s so important to accurately report employees’ tips and keep meticulous records. 

In the past employers have had a few options for how to track and report tips: 

  1. Tip Rate Determination Agreement (TRDA)
  2. Tip Reporting Alternative Commitment (TRAC)
  3. Employer-designed TRAC (EmTRAC)

All of these programs require employers to educate their employees on the importance of properly reporting both cash and credit card tips — with some minor differences regarding how tips are reported to the IRS. 

One key thing to note: the TRDA does not use actual tip revenue to determine tax liability. Instead, employees are expected to report tips at or above an estimated tip rate that is determined by the IRS. If reported tips fall below the established rate, the employer is expected to provide detailed documentation of employees’ names, social security numbers, hours worked, sales, tips reported, and job titles. 

The TRAC and EmTRAC programs do not establish a tip rate, but they do require employers to take on the responsibility of ensuring their employees report their tips. No matter which tip-reporting program you choose, they all generally entail lots of paperwork and vague language — but that might change in the near future. 

What is SITCA? 

Under the new IRS proposal, a new tip reporting program called the Service Industry Tip Compliance Agreement (SITCA) would allow employers to take advantage of their point-of-sale systems and other restaurant tech in order to report their employees’ tips. The IRS created SITCA in order to replace the outdated TRDA, TRAC, and EmTRAC tip reporting programs. 

Most diners are paying with credit cards or digital payment methods these days — so the transaction data is right at your fingertips. And rather than take an educated guess at your average tip rate, the IRS will use actual tip data pulled from your POS to determine tax liability for both employees and employers. They can also easily pull employees’ hours worked and sales information to ensure tips are being properly reported.

This move by the IRS should relieve some of the tax reporting burdens and save time for employers by getting rid of the endless forms and paperwork that were previously necessary for tip reporting. 

What about cash tips? 

As always, employees are required to report their cash tips — which of course can’t be backed up by POS data. The onus is still on the employee to accurately report all tips. If the IRS notices major discrepancies between sales and tips (especially missing cash tips), the employee could be audited. 

What do restaurant owners need to know for the 2023 tax season? 

For now, you don’t need to overhaul your tax practices. You will remain in your current tip reporting program until one of the following occurs:

  • Your restaurant is accepted into the SITCA program 
  • The IRS finds you noncompliant with your current TRDA, TRAC, or EmTRAC program
  • The end of the first full calendar year after the final revenue procedure is published in the Internal Revenue Bulletin

That being said, you should start looking to ensure that your restaurant has everything it needs to succeed under SITCA. Ask yourself: Do you have a POS system that you trust? Do you use a digital tipping solution? With the right technology, your restaurant’s tip reporting and tax liability should run smoother than ever before. 

Interested in the SITCA program? Follow these instructions by May 7, 2023 to enroll.

Tax Tips for Service Industry Workers

Tax season is here — and like many U.S. employees come springtime, you’re probably feeling the pressure. Soon, you’ll be sitting in front of your computer wondering just how much you’ll owe to the government … and maybe even worrying that you’ll get audited. 

No one likes doing their taxes, but for servers, bartenders, and other service industry workers, your tipped income can make things even more complicated. Here’s how to survive tax season as a tipped employee. 

Stay on top of your tip reporting 

Tip reporting is a year-round job. Well before tax season comes around, make sure you know how to properly report your tips.

If you make more than $20 a month in tips, the government needs to know. According to the IRS, it’s your responsibility to report your tip income to your employer, who then reports those tips to the IRS. By the 10th of each month, you should hand over a detailed report with the total tips you received for the prior month. 

We know what you’re thinking: Do you really have to report cash tips?

Sure, it would be great if all of those cash tips were just money in your pocket — but failing to report all of your tips could cost you even more. If you’re audited, you could be on the hook for 20% more of your income. 

Technology is also making it easier for the IRS to sniff out under-reported tips. Under a new proposal called SITCA, the IRS would have access to POS data that includes sales, credit card tips, and hours worked. And while cash tips will still be reported through an honor system, the IRS will have a much easier time proving unreported income.

We’d rather be safe than sorry — so make sure your tip reports are as accurate as possible each month. 

Get to know your W-2 (and other tax forms)

Once your employer sends out your W-2 for the year, you’re ready to get to work on your taxes. 

Thoroughly check your W-2 to make sure the information is accurate — especially if your restaurant pools tips. You should only pay taxes on income that you actually realized, not all the tips that were distributed among your coworkers. 

Most likely, you’ll be filing with a form 1040 — but which one? Depending on your filing status, yearly income, and your deductions, you can use a 1040 long-form, 1040A, or the 1040EZ. Get familiar with what each tax form allows, and use the one that will allow you the largest possible return (or the lowest possible liability).

Take advantage of write-offs 

Think of all the small things you have to buy for your job. For example:

  • Do you have to buy work-specific clothing or uniforms, like branded polos or khakis? 
  • What about work-appropriate footwear that — while not exactly a fashion statement — keep you safe on slick restaurant floors? 
  • Or did you pay out-of-pocket for a training course on alcohol or food safety? 

While these might not be big-ticket items, they all add up and help to reduce your taxable income. 

But don’t forget to keep a paper trail: Make sure to ask your employer for a receipt when you’re buying uniforms, and keep thorough records of other items you’ve purchased specifically for work. 

(Also, take a closer look at your restaurant’s credit card processing fee policy. If you live in a state where your employer can deduct credit card processing fees from your tips, you may be able to write those off too!)

Be prepared for your tax liability

How many zero-dollar paychecks did you open last year? Like most service industry workers, your hourly wage likely went toward your income tax liability from your tips. And unfortunately, the hourly minimum wage for servers probably doesn’t cover the whole tax bill. 

Instead of wiping out your savings account to pay your taxes, start planning for your tax liability a year in advance. After each week (or even each shift) set aside about 15% of your tips, so when you see what you owe the IRS, it doesn’t leave you scrambling. And if you happen to have anything left over — treat yourself! 

Make reporting a breeze with Kickfin

When restaurant teams sign up for Kickfin, tip tracking is a cinch. Refer your restaurant employer or request a demo today!