Editor’s Note: This is the second installment of a two-part series on tip reporting. Part I was published in our March issue.
Your employees are required by law to report 100 percent of their tips. As the employer, it is your responsibility to make sure employee tips are accurately reported. To assist with this, there are several tip reporting agreements designed by the IRS to encourage employer diligence.
The Tip Rate Determination Agreement (TRDA) requires at least 75 percent of employees to sign a Tipped Employee Participation Agreement (TEPA) and report tips received at or above the rate determined by the IRS and the restaurant. The Tip Reporting Alternative Commitment (TRAC) is where an employer agrees to establish and maintain a quarterly education program for all directly and indirectly tipped employees as well as formal tip reporting procedures as outlined by the IRS. Employers assume responsibility for tip reporting, and the IRS doesn’t assess the business employment taxes on unreported tips unless the employees are audited first. There’s also the Employer-Designed Tip Reporting Alternative Commitment (EmTRAC), available only to businesses where employees receive both cash and credit tips. The newest effort by the IRS to simplify tip reporting is the voluntary Attributed Tip Income Program (ATIP). Eligibility requires that at least 20 percent of gross receipts be charged receipts with credit tips, and at least 75 percent of tipped employees must sign employee participation agreements. ATIP provides a formula for employers to determine tip rates. The IRS will not initiate tip examinations if ATIP requirements are met satisfactorily.
Employers who operate large food or beverage establishments (food or beverage is provided for consumption on the premises, tipping is a customary practice and more than 10 employees who work more than 80 hours were normally employed on a typical business day during the previous calendar year) must also annually file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips to report employee tips. (See IRS.gov for forms and more info; The National Restaurant Association also provides information on income laws, see www.restaurant.org).
None of this sits particularly well with pizzeria owners, and the information overload and complexity of the issue is dizzying. Melissa Klein, operations manager and finance director at Stone Hearth Pizza (which has three locations in Belmont, Cambridge and Needham, Massachusetts), says pizzerias are especially vulnerable to negligible tip reporting by young employees who don’t understand either the actual legalities regarding tip reporting or the serious consequences associated with taking them for granted.
“Tip reporting is one of those areas where people like to interpret the law to their own benefit, which, quite frankly, when you’re dealing with the government, you can’t do that,” says Klein. “You don’t want to do that. When you’re a young server — a lot of kids in college will become a server and they don’t fully grasp the implications of tip reporting — it’s so tempting for them (to under-report) … Say, at the end of a typical night, they make $125. (It’s tempting when) they do their cash out (to say) … no one really knows I made $125 — let me just put in $75!”
Klein counters potential confusion by making education a priority from the moment a server is hired. “From the first day of training, they are explained how it works, and that is that you declare 100 percent of your tips,” says Klein.
She also explains to employees that it’s beneficial to them to correctly report their income, because not doing so can be detrimental when seeking a loan or other income-based agreement.
As the IRS continues to interpret and develop tip-reporting regulations, experts advise showing a resolute effort and respect for the law. “What I can suggest and what I always focus on, is creating a procedure and audit trail that shows that you understand the legal requirements and have taken all available steps to ensure compliance,” says James Sinclair of OnSite Consulting. “While good faith might not be good enough, it certainly does not hurt and also ensures without question that you cannot be accused of letting compliance be ignored or fueling any violations.”
When in doubt, pizzeria owners are making concerted attempts to show compliance. “We make sure that, in the aggregate, employees report their tips in an amount that is consistent with the tipping percentage that customers tip on their credit card charges,” says Peter Cooperstein, president of Amici’s East Coast Pizzeria in San Mateo, California. “Now that almost all of our sales are by credit cards, life has become much simpler — both for us and for the IRS. There is no way for us to assure that our servers declare every dollar; however, if we were audited, the IRS would certainly see that we are making a serious effort.”
The best way to avoid an audit is to make sure your operation has an accurate system of checks and balances for tip reporting in place, and continuously educate yourself and staff about income laws. Tip reporting should be a priority, not an afterthought. “If this topic is just one of the million things on a pizzeria manager’s list, it’s a sure thing the ball will get dropped,” says Dan Simons, principal at Vucurevich Simons Advisory Group, a restaurant consulting agency. “This is one fumble, that if picked up by the IRS, either on audit or due to a complaint from a disgruntled employee, can be devastating to a business. While it may seem tedious to stay up to speed with all voluntary compliance guidelines, the alternative is far worse than tedious.”
Lee Erica Elder is a freelance writer in NYC.