The IRS has proposed a voluntary program that employers could choose to use in order to manage the taxes owed on employees’ tips. The program would replace similar existing programs. But some partisan social media accounts have wrongly suggested that the program indicates either new taxes or increased enforcement. Neither is true.
Service workers’ tips have been taxed by the federal government for decades.
They were first explicitly included in the instructions in 1945 for the form 1040, which specified that filers must include “all ‘tips,’ and any ‘gift’ which is really compensation for services.” And before that, it was tacitly understood that tips were part of net income required to be disclosed since federal income taxes were established by constitutional amendment in 1913.
But some partisan social media accounts have been spreading a rumor suggesting that taxing tips is a new proposal or that the existing taxes will be more aggressively collected. Neither is true.
Some of the most popular posts build upon a previous misleading claim that suggested funding to hire up to 87,000 employees for the dwindling Internal Revenue Service workforce would result in enhanced enforcement for low- and middle-income earners. But Treasury Secretary Janet L. Yellen has specified that the new funding will not be used to increase enforcement on taxpayers earning less than $400,000, and most new positions would be in customer service, as we’ve explained before.
“Those 87,000 new IRS agents that you were promised would only target the rich… They’re coming after waitresses’ tips now,” reads one viral Twitter post that’s been copied and reposted on Instagram and Facebook.
And Andrew Klavan, a commentator for the conservative site The Daily Wire, wrote on Facebook, “IRS Moves To Go After Workers’ Tips As Biden Promises Middle Class Won’t Be Taxed More.”
Similarly, Pamela Geller, an anti-Islamic activist who runs a conservative website, wrote on Facebook, “Biden IRS Plans to Crackdown on Waitress’ Tips As Biden Lies No New Taxes On Working Class In State of the Union.”
But, as we said, tips have always been taxed, and there’s no proposal to introduce a new tax or to beef up enforcement of tax collection on service workers’ tips.
There’s “absolutely nothing new,” Eric Smith, spokesman for the IRS, told us in a phone interview.
All of those claims are based on a Feb. 6 press release from the IRS announcing a public comment period for a proposed update to existing voluntary tip reporting programs for employers outside of the gaming industry. Plans to update those programs began back in 2013.
Right now, employers can opt to participate in one of three programs run by the IRS — the Tip Rate Determination Agreement program, or TRDA; the Tip Reporting Alternative Commitment, or TRAC; or a program similar to TRAC that’s designed by the employer, EmTRAC.
The first two programs were introduced in 1993 in order to improve compliance with tax laws about tipping. Under the TRDA, employers work with the IRS to determine a standard tip rate and then 75% of employees must agree to participate, meaning those employees must report tips at or above the standard rate. Under TRAC, employers agree to hold regular education programs with employees about their tax obligations and provide formal tip reporting procedures.
In 2000, the IRS introduced EmTRAC, which is similar to TRAC, but available only to employers in the food and beverage industry whose employees receive both cash and charged tips.
The newly proposed system — called the Service Industry Tip Compliance Agreement, or SITCA — would replace all three. It would use the point-of-sale systems to measure more accurate tipping data, according to the press release.
The proposal is “just a streamlining, essentially, of the whole setup,” Smith said.
The general procedure is that tipped employees are required, and have always been required, to report their tips to their employer and the employer then enters that amount on the employee’s W-2 form, Smith said.
“Of course, not everybody complies,” he said, but the law has always required it.
SITCA is the latest attempt by the IRS to facilitate compliance and, importantly, it would be voluntary, as were the other programs. Comments from the public on the proposed program are due by May 7.
Editor’s note: FactCheck.org is one of several organizations working with Facebook to debunk misinformation shared on social media. Our previous stories can be found here. Facebook has no control over our editorial content.
Internal Revenue Service. 1945 Instructions for Form 1040. Accessed 9 Feb 2023.
National Archives. “16th Amendment to the U.S. Constitution: Federal Income Tax (1913).” Updated 13 Sep 2022.
U.S. Department of the Treasury. Press release. “Secretary of the Treasury Janet L. Yellen Sends Letter to IRS Commissioner in Support of Funding for IRS to Improve Taxpayer Service & Combat Evasion By High Income Earners and Corporations.” 10 Aug 2022.
Jones, Brea. “IRS Will Target ‘High-Income’ Tax Evaders with New Funding, Contrary to Social Media Posts.” FactCheck.org. Corrected 31 Aug 2022.
Smith, Eric. Spokesman, Internal Revenue Service. Telephone interview with FactCheck.org. 8 Feb 2023.
Internal Revenue Service. Press release. “IRS introduces new service industry tip reporting program.” 6 Feb 2023.
Internal Revenue Service. Service Industry Tip Compliance Agreement Program. Notice 2023-13. Accessed 8 Feb 2023.
Internal Revenue Service. Request for Comments on Voluntary Tip Compliance Agreements. 29 Apr 2013.
Internal Revenue Service. Tips on Tips. Accessed 9 Feb 2023.
Joint Committee on Taxation. “PRESENT LAW AND BACKGROUND RELATING TO THE TAX TREATMENT OF TIP INCOME.” 15 Jul 2004.