For restaurant owners and general managers, understanding all of the federal and state tip rules can be overwhelming. Besides knowing how to calculate and report tips, there is a need to keep up with IRS guidance and federal and state legislative developments. Recently, the IRS announced a new service industry tip reporting program that restaurant owners and managers will want to take note of. At the state level, several states have recently introduced tip legislation.
Service Industry Tip Compliance Agreement (SITCA)
On February 6, 2023, the Treasury Department and IRS issued Notice 2023-13 (“Notice”). The Notice details a proposed Service Industry Tip Compliance Agreement (SITCA) program. The SITCA program is a voluntary tip reporting program between the IRS and employers in various service industries.
The IRS notes that the goal of the SITCA program is to improve tip reporting compliance, decrease taxpayer and IRS administrative burdens, and provide more transparency and certainty to taxpayers. For participating employers, there is the opportunity for more flexibility in implementing employee tip reporting policies, protection from liability, and to demonstrate compliance. The IRS news release and Notice further explain that the intent of the SITCA program is to serve as the sole tip reporting compliance program for employers in various service industries and will replace three similar active programs.
The program guidance is still proposed because the IRS is providing the public with an opportunity to provide comments and feedback on this program. Those interested in providing feedback about the SITCA program can do so by May 7, 2023 by following the instructions in the Notice.
State Tax Legislative Updates
Over the past few months, we have also seen several states introduce new tip legislation. A few bills recently introduced include the following:
- Maryland Senate Bill 803 – Introduced on March 2, 2023 and would phase-out the state’s minimum wage tip credit by raising the required cash minimum wage for tipped workers who customarily and regular receive more than $30 per month in tips.
- Georgia House Bill 241 – Introduced on February 6, 2023 and would provide a 50% tip credit toward the cash minimum wage for tipped workers.
- District of Columbia emergency legislation – The Council of the District of Columbia delayed the effective date of the Tip Credit Elimination Act from January 1, 2023 to May 1, 2023. Initiative 82, approved in November 2022 by almost 74% of D.C. voters, gradually eliminates the tip credit.
- Connecticut House Bill 6364 – Introduced on January 20, 2023 and would repeal the tip credit.
- Hawaii Senate Bill 270 – Introduced on January 19, 2023 and would phase-out the tip credit.
If you have questions about any of the above developments in the area of tip reporting, please contact a member of our GBQ restaurant team.
Article written by:
Sara Goldhardt, CPA
Director, State & Local Tax Services
