The Internal Revenue Service (IRS) has released formal guidance on its new tip reporting procedure, the Attributed Tip Income Program (ATIP). ATIP is a three-year program that does not require employers to meet with the IRS to determine tip rate or eligibility. Employers will participate on an annual basis, however, participation by employers and employees is voluntary and does not require a signed agreement with the IRS. The first annual basis begins January 1, 2007.
Employers participating in ATIP report tip income of employees based on a formula that uses a percentage of gross receipts, which are generally attributed among employees, based on the practices of the restaurant.
ATIP provides benefits to employers and employees similar to those offered under previous tip reporting agreements.
Among the significant benefits employers can expect from participating in ATIP are:
- The IRS will not initiate an “employer-only 3121(q) examination during the period the employer participates in ATIP.
- Tip reporting is simplified and in many cases employers will not have to receive and process tip records from participating employees.
- Enrollment is simple. There are no one-on-one meetings with the IRS and no agreements to sign. Employers elect participation in ATIP by checking the designated box on Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.
Employees can also expect benefits from ATIP including:
- The IRS will not initiate a tip examination during the period the employer and employee participate in ATIP.
- The improved income reporting procedures could help employees qualify for loans or other financing.
- Employees who work for a participating employer can easily elect to participate in ATIP by signing an agreement with their employer to have their tip income computed under the program and reported as wages.
Some general requirements for participating restaurants include:
- The employer annually elects to participate in ATIP and uses the prescribed methodology for reporting tips by filing Form 8027 and checks the ATIP participation box. Simplified filing is provided for small establishments not required to file Form 8027.
- Employer’s establishment must have at least 20 percent of gross receipts as charged receipts that reflect a charged tip.
- At least 75 percent of tipped employees must agree to participate in the program.
- Employer reports attributed tips on Employees’ Forms W-2 and pays taxes using the formula tip rate.
- The formula tip rate is the charged tip rate, minus two percent – the two percent takes into account a lower cash tip rate.
- The charged tip rate is based on information from the establishment’s Form 8027.
Details and requirements for participation for employers and employees are available in Revenue Procedure 2006-30.