The Internal Revenue Service has long held the belief that a number of employees who receive tips routinely under-report what they actually earn when it comes time to file their tax returns. In the past, the IRS selectively targeted tipped individuals—a substantial number of employees in the gaming and hospitality industries earn a large proportion of their earnings from tips—and found evidence to support its argument.

As a result, a number of employees have found that they owed additional taxes as well as penalties, and many of these individuals were not in a position to make good on what they owed.

The selective audit process, however, was not an effective or efficient way to collect the proper amount of tax revenue, and so the IRS found assessing tip revenues by casino provides a more effective approach to efficiently maximize the collection of tax revenues.

Tip Determination and Education Program

The Tip Determination and Education Program is intended to increase employees’ reporting of tips to their employers by means of customer outreach and education. The program involves working with employers to educate employees, employer execution of an agreement between the business owner and the IRS and employer participation in one of two programs. The two tip reporting options are the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative Commitment (TRAC).

Both the employer and the IRS agree to certain terms under these agreements. A TRDA is available specifically for the gaming industry.

Participation in either a TRDA or TRAC is voluntary.

Tip Rate Determination Agreement (TRDA)

A TRDA represents an agreement between the IRS and the employer that specifies an agreed upon rate of tips for each occupational category of tipped employees. The program requires the employer to work with the IRS to calculate a tip rate for each occupational category. To be enforceable, the agreement requires the participation of at least 75 percent of the employees. Participating employees must sign an agreement to report tips at the rate specified in the TRDA. While both programs were initially available for all employers, casinos are only allowed to enter into a TRDA agreement.

Benefits for Employees

Assuming that the employee is recognizing a higher income due to tips, they would be eligible for greater Social Security and increased unemployment benefits and worker’s compensation. The increased income would also improve opportunities for financing approval when applying for mortgage, car and other loans, because the tip income is documented and reported on a W-2. If the employer has a retirement contribution plan, there may be additional funding for employees.

A major factor in participating in the program is certainty and peace of mind. Once an employee signs the TRDA plan agreement, the employee does not have to fear any audits on future tips above the agreed tip rate during the agreement period. If the employee does not sign an agreement with an employer that has the TRDA plan, the employee will be subject to a possible audit.

The biggest objection that employees have is that the taxes are taken out of their paychecks based on anticipated rather than actual earnings. In an environment subject to seasonal ups and downs, this procedure can result in an overpayment of taxes by employees during the off-season. The tip rate is based on the average tips of all employees. If employees do not pool tips, some employees might pay taxes on tips not actually earned, while other employees might underpay.

Randall Brody is an enrolled agent and a Liberty Tax Service franchise owner. You can contact him directly at LibertyTaxVegas@yahoo.com.

By Randall Brody

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