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The IRS is eyeing high-tech ways of computing tipped workers' taxes

The new process could also yield a more precise calculation of how much in payroll taxes a restaurant employer should be paying.
The IRS wants to use more advanced tip-tracking methods. / Photo: Shutterstock

The Internal Revenue Service wants to see if the technology flowing into restaurants can help Uncle Sam get all he’s due in taxes from tipped workers and their employers.

The agency issued a notice Tuesday that it plans to assess how technology like current-generation POS and employee scheduling systems could generate more accurate indications of what servers and bartenders should be reporting as taxable income. The calculations would also refine what employers should be paying in payroll taxes.

In the process, employers’ involvement in determining workers’ tipped income might be lessened, according to the IRS. It noted that automatic tabulations of tips would spare employers from collecting the info from servers or other tipped workers and adjusting the numbers if sales volumes suggest the employees are underreporting their gratuities.

Adoption of the process would be voluntary for employers, the IRS said.

The agency has dubbed the tech-reliant process the Service Industry Tip Compliance Agreement, or SITCA. It would supplant the alphabet soup of programs that grew out of an effort by the IRS in the 1990s to collect more income and payroll taxes from tipped workers.

Those initiatives included the Tip Recovery Alternative Commitment, or TRAC, whereby employers of tipped restaurant workers agree to train and police servers on complying with IRS reporting regulations. Although adoption of the TRAC is voluntary, the alternative could be an audit by the IRS of the balker’s tax payments, going back years.

In cases of significant underreporting by servers or bartenders, a restaurant would have to adjust what the tipped workers supposedly earned, using revenue figures and indications such as charged gratuities as their guides. The process is known as tip allocation.

“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 IRS said in announcing that it is now collecting feedback on the initiative.

Among the input the IRS said it hopes to receive are suggestions of how today’s technology could provide a way for employees to report their tips, cash or charged; whether the federal system could satisfy state and local reporting requirements; what tipping peculiarities or irregularities need to be accommodated by the system. The IRS has already indicated that SITCA in its current form would not likely work in the gaming business.

More information on the proposed system is available here, in the section headlined Notice 2023-13.

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