Requirements for Tip Reporting Alternative Commitment (TRAC)

Requirements for Tip Reporting Alternative Commitment (TRAC)

1. Educate employees about tip reporting.

Estimated time commitment: Approximately one-half hour minimum, quarterly.

What does “educating” mean? Well, it doesn’t mean having weeklyseminars on the history of tips (unless you want to do this). Yousimply must emphasize four things to your employees:

1. Employees are obligated to report 100 percent of their tips.

2. Employees must keep records to substantiate their tippedearnings.

3. Fully reporting tips can benefit the employee (Social Security,loan applications).

4. The distinctions in reporting charge tips and cash tips.

How must you emphasize these things? That’s your call. The IRS has been good about letting restaurants pick their own venue for employee education. Some members have simply stamped a stern message on the tipped employees’ paycheck envelope saying: “THE IRS REQUIRES YOU TO REPORT ALL OF YOUR TIPS.” Others have shown the National Restaurant Association’s video regarding tips. Some have even had specific quarterly meetings reminding them of their reporting obligation. Whether elaborate or simple, the IRS just wants you to stress the four points listed above.

WRA recommends that if you do sign TRAC, you may want to see if the IRS is available to do the first educational meeting. This will set the appropriate tone of the seriousness of tip reporting.

2. Set up tip reporting procedures

Estimated time: With a POS system that has each report category, one hour minimum, quarterly; Without a POS system, four hours minimum, quarterly.

Like it or not, signing the TRAC agreement is going to mean more paperwork. When asking yourself the question, “sign, or don’t sign?” you should follow with the question: “Is doing the additional paperwork worth the savings of not paying past-due FICA on unreported tips?” Here are the specific things that you must do to comply.

A) Employer provides reports to directly tipped employees, at least once a month, showing:

  • Gross sales that are subject to tips.
  • Charge receipts with charged tips.
  • Total charged tips reported.
  • Total reported tips.

B) Employees complete the above report by filling in their cash tips received and tipouts. You need to compile this information for your 8027 form at the end of the year, anyway. Keep these reports for at least four years.

C) Establish a procedure for indirectly tipped employees to report their tips.

3. Comply with all tax obligations

Estimated time: Additional time to comply is unlikely, since there are no new tax obligations.

Hopefully you are already in compliance on your tax responsibilities, and this obligation will not mean any additional headache for you. But just in case, the federal tax forms you should be sure to complete are:

1) Form 941, Employer’s Quarterly Federal Tax Return

2) Form W-2, Wage and Tax Statement

3) Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.

Restaurants enrolled in TRAC must mail a copy of their 8027 form to their local IRS district.

EmTRAC Agreements

The IRS developed the EmTRAC Agreement program in response to employers in the food and beverage industry who expressed an interest in designing their own TRAC programs. EmTRAC Agreements are available to employers in the food and beverage industry whose employees receive both cash and charged tips. The EmTRAC program retains many of the provisions in the TRAC agreement including:

  • The employer must establish an educational program that trains employees that the law requires them to report all their cash and charged tips to their employer.
    • Education must be furnished for newly hired employees and quarterly for existing employees.
  • The employer must establish tip reporting procedures under which a written or electronic statement is prepared and processed on a regular basis (no less than monthly), reflecting all tips for services attributable to each employee.

The EmTRAC program provides an employer with considerable latitude in designing its educational

program and tip reporting procedures, which the employer may combine.

For additional information about EmTRAC Program Requirements and EmTRAC Approval Requests,

see Notice 2001-1.

Categories: Archive