Dianne Marquard: Hello and welcome to today's webinar, "Employees' Participation in Tip Agreements with Tip Rates." My name is Dianne Marquard and I'm the Program Manager for the National Tip Reporting Compliance Program or NTRCP. NTRCP is a national program. It services all employers, small and large in the tipping industry. Also presenting today is NTRCP Senior Analyst, Beth Ann Head. Today we have a full agenda. Our objectives are to define tips, to explain the employee reporting obligations for tips under the law, to provide general information and tip agreement, to explain how a tip agreement works and can affect you as the employee, and to inform you of the benefits of participating in a tip agreement as well as general enrollment information. Let's talk tips. Tips are income and subject to tax. Tips are included on your federal tax return as income.

Internal Revenue Code Section 61 states gross income includes all income from whatever source derived. It is a catch-all phrase that includes tip income. Tips are subject to Social Security, Medicare and federal income tax withholding, just like your wages. This is covered in Internal Revenue Code Section 3102, 3111 and 3401. A tip is an additional payment from the customer. The customer decides the amount to pay. We say free from compulsion, meaning it is given freely, and not directed by the server, the manager or the outlet. The customer decides whether to pay an additional amount or to give nothing at all, which we refer to as a tip. Tips are not negotiated and come in many forms or mediums of cash, such as credit cards, chips, tokes, as well as cash or tip-outs received from other employees. The customer determines who gets the amount. What is not a tip? Additional amounts that are decided by the outlets' revenues policy are not tips. For instance, an automatic charge of 18% on a bill for parties of 6 or more or flat banquet fee are not tips, but rather service charges. Service charges are wages if your employer pays the amount to you. Your employer will add these amounts to your wage statement and W-2. Now, Beth Ann, would you like to share with us about reporting obligations and recordkeeping responsibilities? Beth Ann Head: Thank you, Dianne, I would. You are required by law to report 100% of your tips and to contemporaneously maintain a daily tip log of all tips received. There are requirements on the type of information you must maintain. The IRS has forms to help you with this obligation. Just go to www.IRS.gov and select Forms & Instructions at the top of the page. Search for Publication 1244, Employee's Daily Record of Tips and Report to Employer or type in Form 4070A Employee's Daily Record of Tips. We'll talk about another form, Form 4070, in a little bit. These forms and publications can be provided to you and your employer in bulk at request. At the end of our presentation, we have additional resources to share with you, including our e-mail box to send any requests. Now, the next 2 slides have all the requirements of a tip log. Keep your running daily log with your name, address and social security number, you'll also need your employer's name and address, the period or dates covered, and don't forget the dates worked where tips are earned, including credit card and debit card tips received, as well as any tip-outs and who those tip outs were paid out to, before arriving at the total amount of tips received. Let's look at an IRS created form that was developed for your use and convenience. Here is the Form 4070A. The form has boxes for all required items. Here is the Form 4070A. The form has boxes for all required items.

You must include some general information, the log must include the date worked and tips received from both customers and other employees. It should note the credit and debit card tips received, and you must include any tips paid out with the name of the employee who was paid. Daily record keeping is extremely important and required under the law. These forms were developed to assist you with your record keeping. You can use this as a template to create your own tip log too. What are some other obligations to report? If you regularly and routinely received more than $20 a month in tips, you are a tipped employee. You must report all tips received in a month by the 10th day of the following month to your employer. Your employer should have a process in place for you to do this. Through payroll, your employer will withhold the Social Security, Medicare and federal income tax. Why is this important? Well, reporting to your employer helps to track and report all tips on your tax return. In general, it is good tax planning. Reporting tips to your employer allows you to pay your taxes throughout the year instead of having a big payment due with your tax return. Large payments due on tax day can be very tough on any budget. And worse, may result in additional amounts due for penalties and interest. The goal is to only pay what you owe in taxes and no more. An important item to remember is to track and subtract out tips that you pay out to other employees such as bar backs and bussers. Tips paid to others reduces your overall tip income that must be reported. Tips received from other tips employees increase your tip income. Both must be tracked and reported. Now, here is an example of a report to the employer. The Form 4070, Employee's Report of Tips to Employer, can be found on www.IRS.gov, under Forms & Instructions.

Search for either Form 4070 or Publication 1244. The form was also created for your use and convenience. As you can see, the form has all the required items. On the left side, there are boxes for your name and address, your employer's name and address, the month you received tips over $20 and a line for your signature. On the right side are boxes for your Social Security number, cash tips received, credit and debit card tips received, and tips paid out. Box 4 is to add tips together and subtract the tips paid out to arrive at net tip. And again, finally, a box for the date signed and submitted to your employer. Now, that we have covered what tips are and the reporting requirements for tips earned. Dianne will tell us about tip agreements and how the tip program is designed to work. Dianne Marquard: So, we talked about the basics of tips, the laws, your obligations and record-keeping requirement, which is important to know and it can be a lot of work. If you are attending this webinar, it is likely that your employer has a tip agreement with the IRS. What does that mean for you? Well, let's first get an understanding of a tip agreement. Tip agreements are voluntary partnership between the tip employer and the IRS. We are working together to improve tip reporting compliance. During this process, we educate both the employers and employees regarding their tip reporting obligation to improve overall tip reporting and we conduct educational outreach such as this webinar. Tip agreements ease the burden of tip reporting, using average tip rates applied through an employer's payroll system. Tip agreements have great benefits that affect you as the employee, if you participate. Let's walk through the tip rate process. While the tip agreement is a voluntary partnership between the IRS and the employer, the program may be voluntary or mandatory depending on your employer. An employee must sign up electronically or in writing depending on your employer's process. As a tipped employee participating in the program, your employer will apply through payroll an average tip rate. It works just like an hourly wage. However, you will continue to receive your tips as usual and you will not need to report tips at the clock. Let's talk about the calculation of the tip rate. The IRS has been developing tip rates with employers since 1990s, and has decades of financial information and experience. It is likely that your current employer has been participating in the tip agreement program for many years. We use a standardized methodology to ensure consistency and fairness across the country and between competitors. Currently, tip agreements average 90% or more of participation by employees across the country. We call that a success. We have developed a standardized calculation to determine average tip rates for all types of tipped employees based on 2 methods of tipping. One is for sales and the other is for tip per product. If your tip is based on the price of a check and received charge tip, then the rate is determined by sales. If you are tipped on a number, such as bags carried, then your rate is a tip per product calculation.

Established tip rates are customized using current financial data for every outlet based on their sales, staffing and tipping practices. This ensures accurate and fair tip rates. Tip agreements and their established tip rates usually have terms of 2 to 5 years. And they may be adjusted if the employer is affected by a change in operation. What does that mean? If a business is affected by a natural disaster like a hurricane and flooding, it may impact the ability to continue to operate and attract customers. The IRS will work with your employer to reduce rates until operations are back to normal. The tip rates are based on your employer's most current and complete payroll and financial data. We review data on sales per outlet, per position and sometimes per shift. We also factor in the volume of charged sales, cash sales and even comp sales, because we understand that people may leave a lower tip or may leave no tip at all. Are you a waitress, busser or valet? We look at every position, because we know that the tip rates will be different depending on how their position receives their tip. A valet will get tipped based on the number of cars pulled. For those working food and beverage, we consider if you tip out to other employees, such as a bartender making your drinks or bus person clearing your tables. We also look at the outlet and the tipping practices. We understand that working at a buffet or a steakhouse makes the difference, because one is tipping based on the number of customers at the table and the other is based on the price of the meal. One may leave $1 or $2 for each person at the table, and the other may leave an 18% or more tip on the price of a meal. Many times, the rates are developed between shifts, because there are differences between grave, day or swing. We know that tips can change is the shift serves mostly alcohol over the shift that serves coffee. We look at location. A restaurant located on a college campus might not get the tips that the same type of restaurant would make in an upscale tourist town. A waitress who walks 100 feet from the bar will generally make less in tips than one that walks 20 feet, because they are serving less drinks. So again, we base our tip rates to your specific position, total hours in sales, or number of products sold. We bring all that information together into what we call a tip pool. And once we determine the tip pool for each direct position, we reduce the tip pool for tip-outs to indirect positions such as bussers or food runners to arrive at the tip pool for each direct and indirect positions at the outlet. Remember, those auto-gratuities or service charges that we mentioned earlier, we also understand that your employer may impose auto-gratuities or service charges on larger parties of 6 or more. Effective January 1, 2014, all auto-gratuities or service charges imposed by the employer and distributed to their employees must be treated as wages, not tips. Auto-gratuities, service charges and related sales are excluded from the average tip rate calculation. I want to point out another item. If you participate in the tip program, your employer will apply the applicable tip rate worth at each outlet, position and and/or shift. If you work at more than one outlet, they will apply the tip rates for each outlet based on the hours or sales for your time in that position and/or shift. This means that as an employee if your shift is split between outlets or you are asked to work a different shift than your home shift, your tip rate will change based on the rates at the different outlets or shifts. Bottom line, we factor in everything and want to ensure fair and accurate rates are applied to employees. The tip rates have a lot of financial data as well as operational factors that are considered as our goal is to calculate an average tip rate that most accurately reflects the tipping at the outlet. And the tip rate that is established today is effective until the end of the agreement term, which is usually 2 to 5 years, but can be modified for operational changes or economic downturns that may adversely impact the tip's received. For agreements nearing their expiration date, the IRS and the employer work to update tip rates prior to the expiration, so there is a seamless transition. Let's look at an example.

Each tip pool is spread over the total hours worked for each position to arrive at the average tip rate. We use the hours that you are clocked in on the floor and available to receive tips. And, yes, that includes setup and break time, because those hours are part of your shift, and it keeps you from having to clock in and out multiple times during the shift. Let's consider an example. If you make $48 in tips during your 8 hour shift, we use all 8 hours in your tip calculation. So, your average hourly tip rate is $6, $48 of tip divided by 8-hour shift for $6 tip rate. If we excluded the 2 hours of setup and breaks, your average hourly rate would be $8, $48 of tip divided by 6 hours in a tipping capacity for an $8 tip rate. By using the entire 8 hours, we determine your average hourly tip rate, and you clock in at the beginning of your shift and clock out when you leave. It's easier and still results in $48 of tips. This section is for employees who are working at a new outlet. If your employer is newly established with no financial data, the IRS and the employer work to develop what we call comparable rates. For newly opened outlets, we interview the managers to understand the type of operations and services that are expected, such as staffing, seating capacity, menu prices, types of gambling offered and expected customer draw. We then pull data from similar outlets with similar business models and similar location characteristics. In the simplest terms, a steakhouse would be compared to several other steakhouses. An average tip rate is developed and the rates are generally good for up to 2 years.

After that, the employer will have at least a year's worth of financial data available for review to calculate new rates based on actual sales, staffing, and tipping practices for every position, outlet and shift. Now that we've discussed how the program works and how we calculate the rate, let's talk about all the benefits you received for participating in the tip program. Beth Ann Head: Dianne, this is my favorite slide. It is packed with some great benefits for participating in a tip agreement. If you sign up to participate in the tip agreement, you are a participant. If you don't, you are a non-participant. Here are all the benefits for becoming a participant in the tip agreement. The participant is relieved from keeping a tip log. Now, this is such an important component for the employees that I want to repeat it. If you participate in the tip agreement, you do not have to keep a tip log for every day of the tips received. An established average tip rate also known as the participant rate is applied through payroll, while working in a tipping capacity.

What about training, sick or vacation time you ask? The participant rate does not apply to hours paid, but not working in a tip role, such as those training, or sick leave, or vacation hours. You do not have to self-report tips regularly to your employer, because your employer will automatically apply the established average tip rate for the outlet, position and shift. I can't stress this enough. If you are a participant, you do not report tips to your employer at the clock, in writing or in any other method. The participant rate is automatically applied through payroll. If you are used to taking tips on with you, you can still take them home. And here's the icing on the cake, a participant is provided with tip audit protection for the years that they are a participant for the tips related to that establishment. If you join the program and continue to participate the entire calendar year that the program is available to you, then you will have tip audit protection on all the tips received from that establishment. So, why is it important to report your tips? Well, we have all applied for loans or government benefits. And what's the first thing they want to see? Your tax return and Form W-2. That's because the amount you are eligible to receive is based upon your reported income. So increased tip reporting can have other benefits not related to the IRS. Increased tip reporting increases overall income and can affect and increase state benefits like unemployment or disability, or worker benefits like workers' compensation or federal benefits like Social Security at retirement. Reporting can also make it possible to save more through retirement account like a 401(k). Most adults will spend decades working and it's important to get the most retirement as possible. This is achieved through increased reporting. Improved financial reporting can also help us purchasing a home or car loan.

You can achieve a better credit rating and the lender can provide increased limits and better terms, making it possible to buy a bigger home or nicer car. We have heard example after example of employees who have learned this through real-life hardships. We have heard from tipped employees who did not participate in the program and then applied for disability or unemployment benefits, because they may have underreported tips in the past, it meant that their benefits were not based on their full income. The lower benefits were not enough to live on. They had endured an additional hardships when they really needed those full benefits. Once the employee returned to work, they signed up for the tip agreement program to help them more accurately report their tip income and subsequently be eligible for higher benefits. That's why it's so important to show your tips on your Form W-2 and your federal income tax return. We hope that you are as excited about enrolling in the program as we are. Let's start with who can enroll. A participant in the tip agreement is any employee who regularly and routinely received at least $20 or more a month in tips. Remember, that was the requirement for providing a monthly statement to your employer and being classified as a tipped employee. Now, let's talk about what you need to do to participate in the tip program. To become a participant, the employee must sign up to participate with the employer in writing, which can be an electronic signature. See your employer to learn about the process. When you have the opportunity to join the program that depends on whether you are a new employee or an existing employee. New employees are newly hired, and this can include an entire staff of employees for new outlets. To participate, a new employee must select to join within 60 days of hire or the opening date. Your employer may have a shorter timeframe, so check with them about the enrollment process. If you are an existing employee, you have the opportunity to join the program once a year in December, or when a new tip agreement is implemented. The election must be made in enough time to start the participant average tip rate by January 1 of each year. If you decide to participate, your employer will apply the average tip rate for your position to the hours you're eligible to receive tips. However, it is still your responsibility to periodically check your pay stub to ensure your tips are properly being reported and included on your Form W-2.

If the tip rate is not applied during the entire year, then the participant becomes a non-participant for the entire year. Let's talk more about this. If an employee drops out of the program at any time during the year, the employee is considered a non-participant for the entire year and does not have participant benefit. They must maintain a tip log for the entire year and will not have any tip audit protection. Timing and commitment to the program is important.

Dropping out at the end of the year is generally not advisable, but if you do, you must have tip records for each day work back to January 1 or your first day of work for that calendar year. You will then need to subtract tips processed through payroll as a participant from actual tips received during the year. As a participant, it's important to check your pay stubs often to ensure that the tip rate is being applied. Sometimes we see employees who think they elected to participate and learn that the tip rate was not applied. Therefore, they are a non-participant.

Depending on when they learned of the error, they may have to report a large amount of tips at the end of the year. Don't lose out on benefits because of an administrative error occurred. And lastly, sometimes an employee will report additional tips that are received above the tip rate.

Many employers have systems in place to clock-in these additional tips. It is important then to track the tips received with the tips reported under the hourly rate to determine the excess amount to report. We will walk through some examples in just a moment. This slide gives a summary of the differences between participating and not participating in a tip agreement. We've previously talked about all the benefits of participating and the legal requirements if one does not. This slide is for your reference. Now, Dianne, would you like to explain how the employee could claim earned tip amounts, that are higher than the average tip rate? Dianne Marquard: Yes, Beth Ann. Thanks. I'm sure the employees are wondering, "How does a participating employee report above the tip rates? How does that work?" The tip rates are an average. And if you're one of those employees who make more in tips, then you have the option of reporting additional tips at the clock. So, if you want to report the additional tips to buy a house or save more for retirement, then you can still participate in the program and self-report the additional tips when you clock out. However, I want to caution you that the tip rates are an average over 1 year and includes slow, busy in average time period. So, make sure you only report tips you actually receive during the year. Let's walk through an example of when someone may want to report above the tip rate. In this example, the bartender has elected to participate in the tip agreement. She provided the enrollment paperwork with her employer and has been participating since January. In February, the bartender has been looking at home and wants to ensure her full income is reflected on her W-2, so she can afford the type of housing that she wants. In March, the bartender decides to keep a tip log going forward to compare the tip rate with the actual. The information is in the chart. The bartender worked 40 hours a week for a total of 160 hours for the month of March. The tip rate that is automatically charged through payroll is $20 an hour multiplied by the 160 hours for a total tips calculated by payroll of $3,200. The bartender's tip-log shows that she collected $4,000 during the month, resulting in $800 more tips than reported through payroll. The bartender can voluntarily report the additional tips to the employer. But wait, there's something to consider. The bartender holds reporting at the clock because she wants to compare to the month of April when business often decline. The IRS recommends that the bartender continues to monitor the tips to ensure that if there are times when the actual tips are lower than the tip rate, that the bartender can adjust or offset these amounts. In this example, the bartender continues to monitor actual tips received. In the month of April, the bartender works 150 hours. The tip rate continues to be applied to every hour worked at $20 an hour. This amounts to $3,000 of tips going through payroll. The tip log, however, shows a decrease in tips received of $2,800 for the month. This is less than the $20 an hour multiplied by the 150 hours or $3,000 that payroll has already processed.

The bartender adjusts the total excess amount that can be reported to the employer by subtracting $200 from March's $800 excess. The IRS recommends that any employee reporting above the tip rate do so only after a period of time to capture the highs and lows of tipping or report partial amounts over a period of time and not report daily. Overall, the participant has no requirement to maintain a tip log or to provide reporting to the employer and has tip audit protection. The non-participant employee would maintain the tip log, report tips monthly to the employer and have no tip audit protection. Beth Ann, would you cover a few of our commonly asked questions? Beth Ann Head: Sure, Dianne. On the next few slides, we are going to cover a few of the commonly asked questions. The first one reads, "Bartender A elects in writing to become a participant starting January. Bartender A has a tip rate of $20 an hour. On December 1, Bartender A decides to drop from the program and informs payroll to discontinue the hourly tip rate. Which statement is correct? A: Bartender A must maintain a daily tip-log starting on December 1; B: Bartender A has tip audit protection until December 1; C: Bartender A must maintain a daily tip-log starting on January 1; D: A and B; or E: none of the above?" The answer is C. Bartender A must maintain a daily tip-log starting on January 1. Remember, as an employee drops out of the program at any time during the calendar year, the employee is then considered a non-participant for the entire year and would need a tip-log to substantiate tip income earned from the start of the year. Now, the next commonly asked question reads, "Waitress B is participating in a tip agreement. The participant's hourly tip rate is $15 an hour. The total hours worked for the year is 1,000 hours.

The total tips processed by payroll during the year is $15,000. That's $15 an hour times the 1,000 hours worked. The waitress doesn't work at any other establishment. Question: If the waitress is selected for audit, and the IRS determines that actual tips received was $15,500, will the IRS question the additional $500 in tips? That's the 15,500 received minus the 15,000 reported as a participant." The correct answer is no. Remember; the tip rate is an average. So sometimes there can be more tips received than reported to payroll. The $500 was received throughout the year when there were minor fluctuations from the tip rate. But employees who did not keep a tip log would not realize that they collected more. Dianne Marquard: Great, thank you, Beth Ann. Now, for most tipped employees, this is a great program, offering great benefits not offered to most taxpayers.

We recommend that all employees initially enroll and compare actual tips received on your tip log with hours worked times the tip rate for a period of time, for example, 60 or 90 days. If the tip rate works for you, there's nothing to do. If it does not and you are not a mandatory participant, you can cancel out of the program and deduct tip rate hours reported from actual tips received.

This slide has additional resources available to you on www.IRS.gov. I've also included the IRS tip program e-mail address. If you have a question at any time, you can submit to this e-mail box.

In closing, remember that all tips are income and subject to payroll and income taxes. Tip income is reported on the federal tax return, whether you are a participant or not. The main difference between a participant and a non-participant is with recordkeeping and tip audit protection. As a participant, there is no need to keep a daily tip diary or to report monthly to your employer. A participant receives tip audit protection for all tips received at an outlet that has a tip agreement, when the employee enrolls and accepts the established tip rate. We encourage everyone to sign up today. See your employer for your tip rates and for more information on their process.

In closing, we want to thank you for joining us today to discuss tip agreements and employee benefits. Remember to visit www.IRS.gov for more tip information.