Tax Edge

By Robert Steere, Toolkit Staff Writer

A tip income reporting program that has proven beneficial to employers and employees alike in the food and beverage industry has been extended for two additional years by the Internal Revenue Service. The program, which simplifies the record keeping burden on both employers and employees for reporting tip income, was set to expire at the end of 2009.

The Attributed Tip Income Program (ATIP) was first announced as a pilot program in 2006. The program, now extended through December 31, 2011, is designed to enhance tax compliance among tipped employees through voluntary agreements with employers instead of traditional audit techniques.

When originally introduced, ATIP offered a new option to employers in addition to the tip reporting programs that were already in place at the time. Employers operating food and beverage establishments originally could enter into one of two types of agreements. The Tip Rate Determination Agreement (TRDA) requires that tips be reported at or above a specific rate negotiated between the employer and the IRS in return for certain benefits. The Tip Reporting Alternative Commitment (TRAC) requires that the employer provide ongoing education to tipped employees on tip reporting procedures in return for certain benefits.

ATIP differs from those programs in that it does not require an employer to enter into an individual agreement with the IRS. Rather, a qualifying employer elects to participate in ATIP. Generally, to qualify for participation, at least 75 percent of the employer's tipped employees must have agreed to participate and must have signed an employee participation agreement as of the last day of the first payroll period ending on or after January 1 of the calendar year. In addition, the employer must make a good faith effort to maintain the participation rate throughout the year.

Employers who elect to enter into ATIP and comply with the program's recordkeeping, reporting and other requirements are not subject to challenge on audit with respect to the amount of tips that are reporting as wages. The program provides similar benefits to employees. If an employee follows the program requirements by signing an employee participation agreement and reporting all tip income attributed to him or her under ATIP, the IRS will not challenge the amount of tips reported to his or her employer as wages.

The "employee participation agreement" is a document signed by the employee that includes:

• a description of the requirements and benefits of employee participation in the ATIP (specifically including the employee's agreement to report on his or her federal income tax return at least the amount of tip income attributed to him or her under ATIP and reported on the employee's Form W-2 as tips)
• a description of the tip attribution method used by the employer
• a provision allowing for revocation

An employer may also use the employee participation agreement to provide an estimate of the tip amount that will be attributed.

Employers who participate in ATIP report the tip income of employees based on a formula that uses a percentage of gross receipts. Tip income is then generally allocated among employees based on the practices of the restaurant.

Both the employee and the employer benefit from participation in the ATIP program. The IRS will not initiate a tip examination for the period during which the employer and employee participate in ATIP. A participating employee does not have to keep a daily tip log or any other record of tips.

Enrollment in ATIP is simple. An employer elects to participate in ATIP by checking the designated box on Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. An employee who works for a participating employer can easily elect to participate in ATIP by signing an agreement with his or her employer to have tip income computed under the program and reported as wages.

Related items:

Posted December 11, 2009.