Audit-Proof Your Tip Reporting

Food and beverage employers and employees will soon have the option to participate in a streamlined program that will permit them to become “audit-proof” with respect to the amount of tips they report as wages. Beginning January 1, 2007, the Internal Revenue Service (IRS) will implement a new voluntary tip-reporting program for food and beverage establishments, to be called the Attributed Tip Income Program (ATIP). ATIP will continue for a pilot period of three calendar years and will terminate on December 31, 2009, unless the IRS issues guidance extending the term.

Participating employers and employees each can become “audit-proof” with respect to the amount of tips they report as wages by meeting the five requirements described below. If an employer has more than one eligible establishment, the employer must satisfy the requirements separately for each establishment that is going to participate. An employer may have both participating and nonparticipating establishments.

ATIP Requirements

(1) For each calendar year, the following threshold requirements must be met for each establishment participating in ATIP:
(a) at least 20 percent of its gross receipts from the sale of food or beverages for the preceding calendar year are credit card charges and charges under credit arrangements (e.g., debit cards, house charges, city ledgers and charge arrangements to country club members) showing charged tips; and
(b) at least 75 percent of its employees who customarily receive tip income have agreed to participate in ATIP by signing a participation agreement. The employer must make a good-faith effort to maintain the participation rate throughout the year.
(2)The employer must file a separate notice with the IRS for each participating establishment each calendar year.
(3) The employer must use a reasonable attribution method for allocating tips to employees. In general, an attribution method is reasonable if it is applied consistently to similarly situated participating employees and approximates the relative amounts of tips received by different categories of similarly tipped employees.
(4) The employer must properly report attributed tips plus, in certain cases, tips actually reported on each participating employee’s Form W-2 and provide an additional written statement showing the portion of tips that are attributed tips.
(5) Employees must properly report on their federal income tax returns the amount of attributed tips on Form W-2.

Unlike currently existing tip income reporting programs, ATIP does not require an employer to enter into an individual agreement with the IRS. Instead, employers and employees who participate in ATIP will automatically be eligible for its benefits so long as they comply with the above-summarized requirements of Revenue Procedure 2006-30.

For more information on who is eligible for this program and how to meet its requirements, please contact a member of our Employer Services team.