IRS introduces plan to crack down on tips earned by wait staff

by Chris Lange

Chris Lange, FISM News


The Internal Revenue Service has unveiled new guidance to crack down on tips received by food and beverage industry workers. 

The proposed Service Industry Tip Compliance Agreement (SITCA) is a “voluntary tip reporting program between the IRS and employers in various service industries,” according to the IRS website

The agency stated that employer participants in SITCA will “demonstrate compliance with the program requirements by submitting an annual report after the close of the calendar year.” 

The program will also offer liability protections to participating employers “under the rules that define tips as part of an employee’s pay for calendar years in which they remain compliant with program requirements.”

The proposed plan was created to replace current reporting programs and “serve as the sole tip reporting compliance program for employers in various service industries,” per the IRS website.

Critics slammed the new proposal, saying that it will only be a matter of time before the guidelines move from voluntary to compulsory. Some accused President Biden of lying when he promised that his proposal to increase funding and staffing for the IRS included in the Inflation Reduction Act would only be used to help the agency target wealthy Americans to ensure that they pay “their fair share” in taxes.

“Those 87,000 new IRS agents that you were promised would only target the rich … They’re coming after waitresses’ tips now,” Mike Palicz, federal affairs manager at Americans for Tax Reform, tweeted.

“Sending the super-sized IRS after waitress tips to pay for electric Bentleys for the wealthy,” Republican communicator Matt Whitlock wrote.

Hot Air reporter Jazz Shaw pointed out that food and beverage industry employers are permitted by law to pay workers as little as $2.13 per hour as long as the employees can earn at least a minimum wage with gratuities. In other words, these workers depend on tips to earn a livable wage.

“The whole concept of an ‘income tax’ is based on the compensation a person is paid by their employer,” Shaw wrote. “The wait staff’s tips shouldn’t be taxed at all because the patrons are not their employers and are under no obligation to tip them. It’s really more of a gift given in appreciation for good service.”

The Inflation Reduction Act, which President Biden signed into law in August, includes nearly $80 billion for the IRS, part of which was earmarked for the hire of 87,000 additional IRS agents. President Biden vowed at the time that the IRS would in no way raise taxes on Americans earning less than $400,000 annually while members of his party lauded the plan as an efficient way to increase tax revenue and reduce the federal deficit.

The proposed new IRS guidance, however, appears to give weight to Republicans’ longstanding argument that the funding provision would be used to target lower- to middle-income families and increase their chances of being audited.

House Republicans voted last month to rescind the additional IRS funding. However, it is unlikely that the measure will pass the Democrat-controlled senate.

The IRS has opened a public comment period on the SITCA proposal, which ends on May 7, 2023.