Gaming Tip Compliance Agreement
Background:
The Gaming Tip Compliance Agreement is a voluntary agreement for employee tip reporting that is entered into by the employer, its employees and the IRS. The agreement establishes set tip rates (depending on casino, job, work shift and outlet worked) for all gaming employees, other than housekeeping employees, who receive tips.
The benefit to the employees and the employer is certainty and audit protection. From the government's perspective, it provides a guaranteed revenue stream with little administrative effort by the IRS. The IRS and the Nevada gaming industry first signed a Tip Rate Determination Agreement in 2003, and casinos and employees in several other gaming states across the country also participate in the program. The original agreements expired in 2006, and the AGA’s Tax and Finance Task Force, comprised of the tax directors of AGA member companies, encouraged the IRS to pursue reasonable tip rates. Individual gaming companies negotiated new agreements in 2007.
As the recession-caused slump in gaming business began to take hold, the AGA Task Force worked with the IRS to make a significant cut in the applicable tip rates for gaming industry employees. The IRS agreed to make an immediate cut of 20 percent in the current tip rates. This 20 percent reduction actually had the effect in many cases of reducing tip rates below the pre-2007 tip agreement levels because it was applied on top of two concessions that the AGA had negotiated in the 2007 tip agreement—a discount in rates to encourage employee participation coupled with a phase-in of the new rates over a three-year period. In addition, the IRS agreed to delay the second step of the phased increase in the new tip rates from Jan. 1, 2009 to Jan. 1, 2010 and to extend the term of the gaming industry tip agreement by one year to Dec. 31, 2011. The 2012 rate has been at a 15 percent recession reduction agreement.
Status (as of 10/16/12)
In June 2012, the IRS issued new tip guidance about the treatment of distributed service charges, saying that they should be treated as wages and not tips. Distributed service charges (e.g., 18% charge added for parties of 6 or more) are treated as wages, not tips, for FICA tax purposes.
- The guidance applies retroactively to all open tax years, but in “very limited circumstances” the IRS examiner is authorized to apply the new distributed service charge guidance prospectively to tips paid on or after January 1, 2013 to give business time to revise business practices and make needed systems changes. Factors in determining whether these “very limited circumstances” exist for a particular taxpayer are (i) whether the taxpayer’s particular facts and circumstances are not “directly addressed in prior guidance” [examples of prior guidance are cited in the attached IRS Memorandum for All Field Examination Operations] and (ii) whether “the business needs additional time to amend its business practices and make system changes to come into compliance.”
- In a tip rate review, distributed service charges are to be excluded in determining the applicable tip rate.
- In a future announcement, the IRS will solicit comments on proposed changes to the IRS’s existing voluntary tip compliance agreements, including the TRAC program and its variations.
The AGA Tax and Finance Task Force and the IRS continue to maintain a dialogue regarding tip rates, distributed service charges and other issues of common interest.
