Tip Jars - Where Policy and Politics Collide

On this episode of Federal Tax Updates, Annie and Roger focus on tips (the monetary kind), including an industry overview, current challenges with tip reporting, and tip credits. They also examine Notice 2023-13, and the proposed procedure that would establish the Service Industry Tip Compliance Agreement (SITCA) program and talk tax policy and politics.

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Chapters

• (00:00) - Federal Tax Update Episode 4
• (03:45) - Changes in tipping in recent years
• (13:31) - Are you supposed to report tips?
• (21:51) - How tip pooling in restaurants works
• (36:55) - How much longer does tipping survive?
• (38:07) - New updates from the IRS

 
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Creators & Guests

Host

Annie Schwab, CPA

Franchisee Operations Manager at Padgett Business Services

Host

Roger Harris, EA

President at Padgett Business Services

What is Federal Tax Updates?

CPAs, Enrolled Agents, and Tax Preparers can keep up-to-date with the latest federal tax information while earning NASBA approved CPE credits and IRS approved CE credits by listening to the bi-weekly Federal Tax Updates podcast. The hosts Roger Harris and Annie Schwab have over 75 years of tax experience between them, which has been featured in various media outlets including Wall Street Journal, USA Today, The Morning Business Report, Bloomberg Business News, and Accounting Today.

Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

Roger Harris: [00:00:07] Hello, everybody. Welcome to another Federal Tax Updates podcast. I'm Roger Harris.

Annie Schwab: [00:00:13] I'm Annie Schwab.

Roger Harris: [00:00:15] Welcome, Andy. Welcome back.

Annie Schwab: [00:00:17] Thanks, Roger.

Roger Harris: [00:00:19] Let me ask you a question. Have you ever been a bartender or a waiter table?

Annie Schwab: [00:00:24] I have. Not surprisingly, most college kids at some point do wait tables, but I was more on the babysitting dog walking, you know, sort of lifeguarding kind of thing.

Roger Harris: [00:00:38] Yeah. Well, I have a short history as a bartender. It lasted one day. I was helping out. I was helping out a client who needed some help, and he didn't invite me back for a second day. But other than that, I never have either. I've been on kind of like you have the other side of the table or bar, if you will, giving the tips. And I guess I never thought about how complicated. And now in today's world political. Tipped employee can become and how difficult sometimes it can be to keep up with everything.

Annie Schwab: [00:01:10] Yes, I imagine the administrative side of it, the logistical side of it. So many parties are affected, The employer or the employee all different. The server to the waitress, to the cook to. No. Everyone gets gets touched when you're talking about tips.

Roger Harris: [00:01:27] And from a tax standpoint, it's going to impact, obviously, the income of the employee who receives the tips. It potentially impact the business and what they have to pay. And there are some tax credits. So the business is involved. Certainly the customer is involved because tips are supposed to be a reflection of the quality of the service. And then as a tax preparer, it can even impact us. So I guess that's why we thought it might be a good idea to spend a little time going through all the the different ramifications of tips and how how they can be handled and options and choices. And then recently it even got political. And we'll we'll talk about that because you never know what your people hear on the radio or on TV.

Annie Schwab: [00:02:15] So we're talking tips. It really does. It does. It touches payroll income tax, state income tax, state sales tax. And I know I know there are a lot of industries that were struggling during COVID and the restaurant industry was definitely one of them. In fact, we saw a lot of incentives during that time for for restaurant owners and small business owners. But it's important to understand kind of the restaurant industry and some of the ins and outs and terminology and how tips are reported, how they're taxed. And so let's get started. How about that?

Roger Harris: [00:02:49] That sounds like a good idea. Yeah, we all kind of got stuck with dealing with it and thinking about them even when we were doing PPP loans and RC credits where the tips factor in. So. Right, right. Whether you like it or not, we're, we're in it. So yeah, let's get started and go through some there'll be some interesting things and there'll be some tax things and then we'll see where we are time wise and we'll cover a few more. So what do you want to start?

Annie Schwab: [00:03:13] Well, Well, tips are not new. I can tell you that tipping has been around for for quite a while now, and it's always been taxable to the server, to the waiter. You know, that that, again, is nothing new. And the employer has always had a reporting requirement to the IRS as well as Social Security. So you know that that's not necessarily new to the table. There is a bit of some trends maybe. I would say I don't know about you, but I don't care around a lot of cash anymore. I do everything with credit card or debit. You know, leaving a big cash tip on the table to me is is not something that's that I do. I don't know about you.

Roger Harris: [00:03:52] You don't see it very often. I mean that's probably the biggest change in in how tips and it's caused to be changes in how tips are thought of, if you will, because it used to be we all finished a meal and we reached in our pocket or purse and we threw money on the table. And theoretically, the waiter or waitress was supposed to report that to their employer and it was a little harder to track. But now I think most of us use debit cards, credit cards, and and that's all tracked again, in most cases. Those are still some cash.

Annie Schwab: [00:04:27] Yeah, Well, and now for me, when I get a receipt, the first thing I look and see is did they already add the tip in? Did they add a service charge? And if so, how much was that? Do I want to leave another? You know, do I want to leave something else in addition to that? And it used to be just for big parties. I remember, you know, it used to to parties of six or parties of eight or something. But but even now, especially when I travel, you know, hotel restaurants and those kinds of things, they just go ahead and add what they call a service charge on there, which is not exactly the same thing as a tip. And we'll talk about that. But but I'm starting to notice more and more places go ahead and sort of add a flat rate to the bills.

Roger Harris: [00:05:06] Yeah. And whether it's because of the complexity of keeping up with tips and payroll or whether it's just a trend kind of post-COVID and hiring people, you're actually seeing some restaurants now that don't have or say they don't allow for tipping and they're compensating employees at a higher, higher hourly rate. And that doesn't mean I guess I don't know what they do. If you want to leave at 20 on the table, I'm sure they don't chase you down and give it back to you. But yeah, no, but in theory they've eliminated tips. And I think part of it's because of some of the things we'll talk about in this next few minutes is there is a lot of complexity and rules and things. And if you if you've ever had a restaurant as a client, I used to love them as clients, partly because the complexity, which is a curse in one way is also an opportunity. Because if you knew how things work, you came across as an expert in the restaurant business. And also if you had a good client, it's a good restaurant. Clients, They usually were pretty nice about giving you free food.

Annie Schwab: [00:06:06] So I was about to say, I think you like the clients because you like to go visit. Of them at lunchtime. Yeah. And get. Get some food or some tasters or that kind of thing. Yeah.

Roger Harris: [00:06:15] They always say we don't try this out. What do you think? So. Yeah. No, like so. Yeah. Look, there is a it comes from a lot of different angles, a lot of different things. The trends in the industry impact how we have to account for certain things. So I don't know. Where do you want to start? I mean it's, it's everywhere.

Annie Schwab: [00:06:31] Well, I guess to two main points here. It's it's common that a waiter or waitress or whatever, they're they're not paid the standard minimum wage. Their tips are meant to compensate the workers. So they're usually paid like a fraction of a minimum wage. And so, you know, we're going to throw a number out there. Maybe it's, you know, $3 an hour and then they get tips on top of that. Well, all of tips, whether it be the the salary per hour or the tips, all of that is considered earned income. And essentially, the employer should be withholding tax on that for the the employee. And so now we were talking the other day about some of these restaurants out in Vegas or DC. I mean, it could be significant the difference between just their hourly rate for the hours that they work and the tips that they get higher end, you know, restaurants and especially, you know, if you're a good server, you know, and there's an incentive there to to provide good service, you could really I mean, you can earn a lot in tips.

Roger Harris: [00:07:40] Yeah. A good, good waiter or waitress in a high end restaurant can easily have a six figure income. And a good portion of that, if not most of that is going to come from tips. Now, you mentioned how much they have to pay them. We tend to focus on the federal rules, but the state's rules have have moved and sometimes make the federal rules kind of irrelevant because the federal law says, you know, our minimum wage at the federal level is still just a little over $7. You know, it's very.

Annie Schwab: [00:08:10] Low seven and a.

Roger Harris: [00:08:10] Quarter. So and you have to pay $2 and what is it, $0.15?

Annie Schwab: [00:08:15] $0.15.

Roger Harris: [00:08:16] And then the tips have to make the difference to meet the federal minimum wage law. But then you're in other places in states where the minimum wage is much higher than that. So the effectiveness is you have to pay them the minimum wage to comply with the state law, which effectively means that you have met the federal law without the tips. So that doesn't mean you can ignore tips or that don't. As you said, they always have been and always will be taxable. But that federal minimum wage is so low compared to most states that while we focus on that part of the law, state law is kind of made it irrelevant in terms of at least meeting the federal minimum wage law.

Annie Schwab: [00:09:00] The minimum, Yep.

Roger Harris: [00:09:01] So so that's I guess the first thing you've got to have at least the minimum wage with wages and tips combined.

Annie Schwab: [00:09:07] Yeah. And I mean, I guess so. I guess we're here today because just recently, I don't know, in the headlines on the news, tweets and blogs and all of the above, I've seen some things out there. I mean, so I have a few written down here. It's see if this jogs your memory. Biden's IRS slammed over a plan to dip into the tip jars already struggling to survive or IRS introduces new service industry tip reporting program. Irs plans to crack down on waiters and waitresses. So, I mean, these are the kind of things and what what happened was merely the IRS coming out with a new way to calculate and report tips. And it's I mean, this is a proposal.

Roger Harris: [00:09:54] This is not it's not even a law, just a proposal.

Annie Schwab: [00:09:57] Not a law. And then it went from there and then it went to all the new IRS agents are going to be going after all the waitresses. And, you know, you see this the snowballing very quickly, right?

Roger Harris: [00:10:08] Yeah, It's it's a sign of where we're we're probably going to for the next couple of years. No matter what comes out of the IRS, it's going to be viewed in the perspective of the money that they were given and the fact that they could hire new employees. So what happened is the IRS put out a proposal that, first of all, it only impacts a small number of well, it's probably a large number of restaurants, but it's the larger ones. It's not the little mom and pop restaurant.

Annie Schwab: [00:10:36] Right. Right.

Roger Harris: [00:10:36] It was a proposal. It was it's not a rule. And we'll get into more detail on what they actually put out later on. But it immediately got scooped up in the politics and it offered mostly the conservative media and certain Republicans to go back and say, see that money and all those agents, they're going to be auditing waiters and waitresses instead of, as they said, people making over 400,000, which is not true. But it got a lot of publicity. It was on the news. It was in the TV. You had waiters and waitresses furious thinking that they were going to be audited. So it's kind of the cross-section of where we are today between politics and taxes. And, you know, it's important for us to understand what's true and what's just politics.

Annie Schwab: [00:11:24] But as a result of that, if you have clients in the restaurant industry, it's probably something that's going to, you know, come up in conversation sooner than later, especially while you're doing tax returns this this year. You might get some questions on that. So knowing kind of what what's happening and what's kind of overblown, so to say. Of course, the IRS has has said, you know, the the goal of the program was to to improve the tip reporting compliance and to remove the administrative burdens. So we'll see. We'll see where it goes. But but it is important to understand how the industry works because it's a complex industry and it's a lot of paperwork and administrative stuff and small business owners have to deal with that.

Roger Harris: [00:12:05] And if you do tax returns, personal tax returns for people who are waiters and waitresses, it'll be interesting to see when they come in this year if they've been scared into being afraid of being audited, because again, it scared a lot of people who are waiters and waitresses, because we tend to believe what we hear in the news and read in the newspaper or hear on the radio or whatever, you know, And they may actually be afraid that they're they're being singled out by the IRS for for audits and. Be interesting to see if they have. Yeah, I know. Because all the tips they want to talk about.

Annie Schwab: [00:12:39] Yeah, exactly. Because it's been an industry where, you know, kind of skirting the total amount of tips is not uncommon. So to say no, it's getting harder to do with everyone doing debits and credits and not having so much cash floating around at the restaurants. But, you know, this year we might or next year even we might see some waiters and waitresses who are making a lot more in tips than they have before.

Roger Harris: [00:13:00] That's right. And let's make one point very clear, because we're going to go through a few specifics and we're going to talk about something where there's an 8% or where there's allocations or where there's tip pooling and all those sorts of things. One thing has always been true and never changed. You are supposed to report all the tips you receive, whether or not they're cash or on a credit card. There is no threshold under which or over which you don't have to report. There's a lot of fallacies out there that there are caps. So keep in mind, tips have always and will always be considered income, just like they got paid by your employer because that's money that went to you. And doesn't matter whether the employer gave it to you or a customer gave it to you.

Annie Schwab: [00:13:47] Exactly. And another thing that's been tried and true is, is the IRS has made an important distinction between what's called tips and what's called a service charge. Right. So, like, if a customer adds something to a bill that's voluntary, that's considered a tip, that's that's something provided based on the service. But if the restaurant adds what's called a service charge, like I was talking earlier about, for some, like large parties, it's not a tip that's not the same. And then the restaurant can can distribute that service charge to the servers however they wish and report them as wages and withhold on income and Social Security tax. So, you know, those are two to you know, those two different things. Small distinction there when when you're looking at a bill or you know, you're you're filling out the bill or the tip and signature and totaling up or whatever, but they are treated differently.

Roger Harris: [00:14:37] Yeah. And one one thing that creates a lot of confusion in that area is if you add 20% to a bill and let's say that's $20 and you turn around as the business owner or the employer and hand that $20 back to the waiter or waitress that serve that table, it's no longer a tip. It's just wages because it wasn't, quote, voluntary and done by the customer. You added it on as a the business and therefore it was your money, not the waiters or waitresses money. However, you chose to give that back to them. It went from a tip to a wage. So you have to report it that way. And sometimes that matters when we get into things like tip credits and other things while it's the same $20, it can make a difference. And as a restaurant owner, you want to think about how you want to handle those things and when do you want to charge service charges and as you'll see, maybe lose some of the tip credit that you're entitled to, because had it been a tip, you might have gotten a credit. But now that you call it a wage, you don't know all these other things. That's why this is actually a fascinating when you look at how all the stuff goes through tips and how complicated they can be.

Annie Schwab: [00:15:57] Yeah.

Roger Harris: [00:15:58] For something that seems so simple.

Annie Schwab: [00:16:00] Well, then some of the software to the point of sale kind of systems there, I mean, there's a reason that we have software to help, you know, maintain these records and determine who's getting paid what and who's tips and what goes into the W-2 and what needs to be withheld. And, you know, there's the complexity there.

Roger Harris: [00:16:19] Yeah. And one other thing that we as tax practitioners or accountants, particularly for restaurants, need to pay attention to. If I am a restaurant owner and I decide I'm going to just and a lot of times it's done to protect the employee, I'm just going to charge everybody 20% because I got some lousy tippers in this customer. So to protect my employees, I'm going to add a flat 20% to every check. That way, my staff is going to be well compensated. Well, when you do that in some states, I'm in Georgia, for example, In Georgia, that becomes subject to sales tax. That 20% that you automatically added is also subject to sales tax. So you're making a decision that may impact your sales tax. So you need to be careful to know how does your state look at that? I guess, compensatory charge that's there, You don't have a choice. Is that considered part of your sales versus wages or tax?

Annie Schwab: [00:17:18] And then think about that.

Roger Harris: [00:17:19] Yeah. Yeah. So got to think about that, too. All right. Let's see. We're kind of rambling there. So many places. I don't know where to go from one to the other because I think about it as a customer, you know, how does it impact me? You know, And I don't know. Have you noticed a difference in quality of service when a service charge is added versus when the waiter or waitress knows that their service is going to impact how much you tip?

Annie Schwab: [00:17:47] I can't say that I've actually noticed, but I, I totally understand how it could impact the the waiter or waitress incentive to do a good job. I mean, if it doesn't matter, you know, if you bring the food to the table and you, you know, you say, oh, you know, enjoy and you turn around and walk away, you know, if there's no incentive to, you know, to check back and say, hey, do you need anything? How does it taste? You know, Are you enjoying is there anything more I can get you? I mean, I think the experience for the customer could easily be be affected by how tips are done. And maybe I need to pay a little bit more attention and and see. But I, you know, I, I when I have a good waiter or a waitress, I certainly recognize it. I mean, there are some that just do the basic right. But those that really go out of their way that really do a good job, it's noticeable. And I would hate to lose that, especially in the high end restaurants. I mean, you expect that. So I don't know. It could impact the customer, it could impact your employees. It's it kind of as a.

Roger Harris: [00:18:55] Yeah. And like I said, some restaurants are just eliminating tips altogether and building it into the price of the food. I think at some point. It will impact the service that we get. It shouldn't. I mean, I know you don't get tipped and we try to do a good job for everybody, but we're not used to being tipped either. So I guess. But if I knew that my income was dependent on the tip, you would think I would really want to do a good job for my customer so that they will leave more. Now, sadly, some people don't tip well. It doesn't matter what the level of service.

Annie Schwab: [00:19:26] Yeah.

Roger Harris: [00:19:27] Yeah. So, I mean, it's all over the place, but, you know. The decisions that the taxing agencies make and the restaurant owners make could have an impact on us as consumers. No. We're we're recording this and it's not too long after Valentine's Day. And, you know, I'm sure a lot of people went out and had good experiences, had bad experiences. And kind of the way you speak to that is your tip. And when that that's taken away, you know, not for tax purposes or other than just how good was my service. It's going to have could have a dramatic impact on how much somebody makes and what do you have to then pay your employees to get them to come to work for you? Because now you're really basically accepting all the burden.

Annie Schwab: [00:20:12] Well, and we were just thinking, if you think about this, you know, think of what's called tip pooling, for example. So, I mean, if the chef or the cook or, you know, someone else on that team is also not incentivized, then everyone could be affected. If you have a tip pooling kind of arrangement, you know, if the food comes out and it's either overcooked or undercooked or cold, when it should be hot or, you know, that's going to affect the tip. And that tip affects more than just the kitchen. You know, the the dishwasher gets affected, the maitre d gets affected, the server gets affected, the bartender, you know.

Roger Harris: [00:20:51] And you raise a good point. You're talking about it from a consumer standpoint. But tip pooling, particularly in your bigger restaurants, your your change, the ones we've all heard about tip pooling is is and I'm not sure that's the technical term, but I think once we describe it, you'll know what we're talking about. That waiter or waitress is supported by a runner, it's supported by a chef, it's supported by all those other people behind them. And usually the business has some form of arrangement, formal arrangement that says you're the front line person. So the tip is going to come to you waiter or waitress, but you're expected to give some of that to the runner, some of that to the chef. And there's reporting requirements for that that we'll touch on. And the reason that's important, so they all work as a team, if you will, to earn the money. And then it's important that that money get distributed to the proper person, because I can tell you this. If I'm a waiter or waitress and I give. A third of my tip to a runner if I don't properly account for it within the system at that restaurant, I'm going to end up paying tax on money that I didn't get and the runner is going to get away scot free.

Annie Schwab: [00:22:12] So Absolutely. Absolutely. And that happens a lot.

Roger Harris: [00:22:16] Yeah. And it depends on if you're new, you don't understand the system or whatever. But hey, if you're a waiter or waitress, you better be really clear in how that sharing of tips works and what the system within the restaurant is. It's not something we should do as the payroll people, right? If we're doing payroll in our business, that needs to be done before it comes to us. Now, your point of sale systems are more sophisticated. They'll handle a lot of that. And I guess as you mentioned it earlier, just about everything on debit and credit card now. So.

Annie Schwab: [00:22:49] Yeah, that's probably not. And the IRS has some it's like a little booklet or like a tracking sheet, I should say. I mean, there's there's some tools out there that the employees can use to track tips and and doing it they're supposed to do it on a daily basis and then they're supposed to turn it into their employer on a monthly basis and kind of thing. They do have a responsibility for for record keeping. Yeah. So that's important to know, too.

Roger Harris: [00:23:16] I'm probably going to be saying a lot about who I am as a person, but I'm going to use it, something that I see a lot. When you're watching a busy bar, you'll notice a lot of times on the counter by the cash register there's just a big jar and every time somebody tips, they, you know, they put the money or they put the credit card or they do whatever, and then they take money out and throw it in that jar. And so you watch that jar fill up as the night goes on. And then at the end of the night, it all gets divvied up. I think that's probably what makes the rest nervous.

Annie Schwab: [00:23:50] Is.

Roger Harris: [00:23:50] Maybe all that jar of money building up. Now, remember, most of that's on a credit card somewhere else. So.

Annie Schwab: [00:23:57] Right, Right. But they should whenever you're handling.

Roger Harris: [00:24:00] Yeah. So there's got.

Annie Schwab: [00:24:01] To be some cash back and forth.

Roger Harris: [00:24:03] Some reconciliation of how much cash got accumulated, not jar and where it went and who got it and how does it tie back to the credit cards. But every restaurant can be a little bit different. And there's some rules that apply across the board, and then there's some that apply to bigger restaurants, more than smaller ones.

Annie Schwab: [00:24:20] So yeah, that's right. There is something like four large food and beverage establishments I think is, is the term and there's there's qualifiers for that. I know you got to have more than ten I believe ten employees. Right.

Roger Harris: [00:24:34] And tipping has to be customary.

Annie Schwab: [00:24:36] Yes. Yes.

Roger Harris: [00:24:37] That's pretty much.

Annie Schwab: [00:24:39] All. There's some reporting for that as well.

Roger Harris: [00:24:42] Yeah. That's that's an annual form. And this is where a lot of times there's confusion. We talked earlier about there being a max. The IRS decided a few years ago that if the tips in one of these large food or beverage establishments had to at least reach 8% of sales, if it didn't, then the difference between whatever the total was in the 8% would be allocated to the staff. So what a lot of people heard was I only have to report 8% of.

Annie Schwab: [00:25:13] All right. Right.

Roger Harris: [00:25:15] Well, no, that's different not to report all of them, but if you fall below 8%, that difference of whatever let's say your total for the year, this is an annual form, by the way. It's done at the end of the year. If your annual rate that you reported during the year was only 6%, that extra 2% had to be allocated under some different rules. And you could have there was different ways to do it, but basically you had to go on the W-2 and put a number on one or more employees to make up that 2%. So it was if you're in the payroll business or the compliance business with restaurants, you better do that form before you do W-2s because you find out you've got to go and put something on the W-2. And if you've already handed those out, you've got a problem.

Annie Schwab: [00:26:04] Then you're amending and then your yeah, then it just becomes a nightmare.

Roger Harris: [00:26:07] And what's interesting, if you are in a waiter or waitress that gets allocated tips on your W-2, and this is good to know as a tax preparer as well, that does not mean it has to go on the tax return. If a waiter or waitress comes in to you with allocated tips on their W-2 and they believe they have substantial enough records to prove that the tips that they reported was accurate, they may have reported 20%. But the overall restaurant came under the 8% and somehow they got they shouldn't have. But it's possible based on the allocation rule. So they got something on their W-2 and they are confident that they can prove that they did not create the shortage. They do not have to report them. So as a return preparer, if you see a W-2 and you're doing a tax return, look on the W-2 and see if there's something called allocated tips and ask the waiter or waitress if they want to report them. I would think most people would probably need to say yes, because they don't have great records.

Annie Schwab: [00:27:16] The records. Right. It's it's hard. I mean, think about it. Every single shift, you work to keep track of that and then to tie that back to your W-2. I mean, that's that's a lot of work for your average waiter or waitress to to know exactly where that shortage went and whatnot. But but you're right. I mean, theoretically, you are correct. If they can validate the amount that they reported and it they don't want to report the allocated tips, then.

Roger Harris: [00:27:44] They don't have.

Annie Schwab: [00:27:44] To.

Roger Harris: [00:27:45] But most of the way, again, I live in a college town. So many of the waiters and waitresses here are college students. I don't think they're, you know, really good record keepers. So, no, probably if they got tips allocated to them, they should probably report them. So short term, the thing you need to be there is a form. It's an 8027. It's an annual form that a restaurant that meets the rules, you know, large food and beverage needs to file. Do it before you do W-2s and make sure that if you do a tax return for a waiter or waitress who has allocated tips that they know whether they need to report them or not. I guess that's the the rules as it relates to allocated tips. Yeah. And that's where somebody will say, well, you only have to report 8%. Well, no, you don't. That's not that's the minimum for the 8027.

Annie Schwab: [00:28:35] There's another aspect. It's the tip credit, Right. That's another reporting piece here. And I think it's actually called the FICA tip credit.

Roger Harris: [00:28:45] Yeah. Because it's based on the hike and Medicare, I guess.

Annie Schwab: [00:28:48] So that's something else that we all need to, you know, as a preparer, tax return preparer, need to make sure that we calculate that as well.

Roger Harris: [00:28:56] Yeah. And without getting into a lot of detail because there's there's some some similarities, we've talked a lot. We have seems like every podcast we can't go without mentioning I.R.S. But there's some similarities here is that basically the FICA tips credit has to do with the FICA and Medicare tax that you pay on tips above the minimum wage. And there's a calculation and you get a credit. But that credit then has to be well, in the I.R.S., we had to reduce wages by the I.R.S. credit. In this case, we have to reduce our payroll tax expense by this credit because we're getting a credit for it instead of paying it. So.

Annie Schwab: [00:29:33] Right. No double dipping.

Roger Harris: [00:29:34] So just think of it as dipping. It's, again, kind of the same. And it has to go back to the time when the wages were paid. Now, this should be done in real time. But assuming yeah, you you if you get a client and you come in and they didn't take advantage of it in a prior year, you could go back within the statute, amend it. You still have to go back and amend the return. So that's where the kind of the I.R.S. similarities come in for that TIP credit because it's focused on payroll taxes versus payroll, has a lot of the same characteristics as I.R.S., but it's it can add up to be a lot of money.

Annie Schwab: [00:30:08] Yeah. Yeah. Because so that's another.

Roger Harris: [00:30:11] That's another credit. Yeah. If you're a if you're doing accounting or tax work for a restaurant, that's something you need to know. Is that that, that tip credit is out there and again they're paying those taxes anyhow. So the credit is just kind of a bonus. I mean I guess you could look and see if is the deduction for the payroll tax is worth more than the credit?

Annie Schwab: [00:30:34] Generally not.

Roger Harris: [00:30:35] Yeah. Maybe in a loft situation where you can carry over the loss, but for the most part.

Annie Schwab: [00:30:39] Oh, maybe.

Roger Harris: [00:30:40] Probably the credit's going to be the most beneficial.

Annie Schwab: [00:30:43] So I would say for for most clients, it's going to the credit for sure.

Roger Harris: [00:30:48] Right.

Annie Schwab: [00:30:49] So let's circle back. So we mentioned that this sort of why we're here today and why we're talking about this was due to a proposal by the IRS with regards to what's called a voluntary tip compliance agreement. So if we circle back to that, traditionally there have been, I think, three I want to say three different ways that the voluntary tip agreements could go. So you've got the alternative one, you've got the rate determination one, you've got one special for like the gaming industry. And you know, we're not going to go into detail about each one of these, but just know that there were options. Right?

Roger Harris: [00:31:28] Right. Because they were all negotiated by the the business and the IRS. They were.

Annie Schwab: [00:31:32] Correct.

Roger Harris: [00:31:33] You had to volunteer to be in this program, but you could go out and say, hey, I want to set some tip standards for my business or businesses, and they would work with you to do that. But it was voluntary. You weren't required to do it.

Annie Schwab: [00:31:48] When it was. If you entered into one of these, it was actually easier on the employer side because then it was just standard and they knew. What they were doing and they knew what the reporting was. And and so that I mean, there is a benefit for for doing. Sure.

Roger Harris: [00:32:03] And it did set a guide to say this is what the tips for this business. Kind of it, honestly. I mean, it's. Yeah, yeah. Whether you intended or not. But if we if we agree that 12% was our tip rate and that's kind of where it all landed.

Annie Schwab: [00:32:19] Yeah, absolutely. Yeah. So, so what was proposed would eliminate all of those three, all of those options and just.

Roger Harris: [00:32:28] Accept the game, the game being a separate.

Annie Schwab: [00:32:30] Oh the gaming would stay.

Roger Harris: [00:32:32] Gaming because that's a whole different animal if you've been to a casino, you know, tipping.

Annie Schwab: [00:32:36] In a casino. Yeah. I guess a.

Roger Harris: [00:32:37] Completely different animal. Yeah.

Annie Schwab: [00:32:39] Yeah, yeah. So. Well, this would be, this would be one for sort of the restaurant industry, right? So it would create a single voluntary compliance. And it was I'm going to see if I get this right. I believe it was IRS notice 2823, Dash 13 and came out with a second week of maybe first or second week of February. So relatively new, which is why it's hitting the headlines right now. But if you want to look at that, notice, it's 2023, dash 13, so you can look that up.

Roger Harris: [00:33:11] And all it was was because what's happened over the last few years is there are more technologies in point of sale systems and more and more things are happening on credit and debit cards. So what the IRS was saying is, hey, we've kind of come up with this one size fits all that. We think if you follow this rule again, it's voluntary, right? This should be simpler and easier for everybody. But all they did was put out a proposal for comment. It's not a rule yet. It's not even an option yet. But in the political world that we're in today and we're kind of repeating ourselves here, it got picked up by the media as a IRS program as opposed to an IRS proposal that targeted tipped employees, waiters and waitresses for compliance and that they were all going to be audited. And that's just not the case. If you do a lot of restaurants and have and a lot of them have tip agreements, you can actually go to the notice and offer your comments as to whether you think this is a good agreement, what you would change about it. And they look at them now. I mean, I don't know. They look at every single one on how many comments they get, but that's all it is right now. It's nothing other than a proposal. There's a time limit for people to respond. And based on how people respond, they may change it or it may stay with it, but it's still voluntary.

Annie Schwab: [00:34:36] So yeah, and you can do it by mail or you can do it electronically. And it does go on public record. So, you know, for those who want to make a public comment there and the notice is the address and then also how to submit it electronically.

Roger Harris: [00:34:51] So yeah, but don't don't have your restaurant clients or your tipped taxpayers. Tell them not to worry. This has nothing to do with the Inflation Reduction Act and the additional spending of the IRS and the hiring of new auditors or agents or whatever. They're going to do those. They're bringing those two together and somehow tying them together for, I don't know, attention or political purposes or whatever. None of that's the case. This just doesn't single out or doesn't signal that the IRS is targeting tipped employees. I think that the industry changing is going to be a bigger I don't know if it's a threat, but.

Annie Schwab: [00:35:33] We'll have a bigger impact on the reporting because it's easily tracked when you do credit cards and debit.

Roger Harris: [00:35:40] Cards. And how much longer does tipping survive? You know, do we go to service charges? Do we go to flat rate pricing that includes and restaurants just end up paying their people an hourly rate versus even having tips? I think the changing in the industry might have a bigger impact on what we're doing than than certainly than this proposal from the IRS will do. But yeah, it doesn't make for good headlines.

Annie Schwab: [00:36:11] That is true. That is true. Well, I know we're nearing the end of our podcast, but we always try to kind of touch on a couple of current events or some things that are going on just so that everyone stays up to speed. And so. Are you ready, Roger? Are you ready to go?

Roger Harris: [00:36:28] I think I think, you know, I guess we'll wrap up tips by saying go out, tip well, treat your waiters and waitresses with respect. And and if you want to take advantage of some of the difficulties or rules, it's a good way to get some new clients is to understand these things and go help your restaurant clients comply with all this crazy stuff around tips. So that's enough on tip. Let's move.

Annie Schwab: [00:36:53] All right, all right, All right. So here we are, mid to late February, the IRS is accepting tax returns. They began accepting in January. As a reminder, they are saying that returns are being processed and those with. That e-file was direct deposit is the fastest way to get your money. No shocker there. They're reminding tax practitioners and taxpayers to use that online tool for. Where's my refund if people are anxiously awaiting their their refunds? As always, in the past couple of years, those returns that have the earned income tax credit or the additional child tax credit, those returns get held a little bit longer, mainly just to prevent fraud and return.

Roger Harris: [00:37:42] Fraud, filter.

Annie Schwab: [00:37:43] The fraud filter. So those will be processed towards the end of February. So just sort of an FYI on that. I know a lot of softwares are still kind of maybe waiting on form releases, especially at the state level. But for the most part, the IRS system is open. Electronically filed returns are going. Taxpayers are seeing process returns by now. Most of our individual clients have received their W-2s or should have. You know, now we've got all these online portals where taxpayers can go in and get get the information they need from their brokerage accounts or employers. So you would expect that hopefully tax payers are getting the information to their tax practitioners to to get the returns out the door.

Roger Harris: [00:38:32] So, yeah, and again, we talked about it, it's it's a non maybe first non COVID year so we don't have a lot of changes. The IRS isn't faced with changing forms at the last minute. It's probably states that are. So that's maybe you'll get some hold up on states but yeah pretty much with the exception of those fraud filters where we're blowing and going for this tax season.

Annie Schwab: [00:38:57] Yeah. And there were there were several states that did get extensions on the filing deadline due to natural disasters. So, you know, if you're in one of those states, you know, things might be coming in a little bit slower or you might just have a little bit more extra time. But, you know, a list of those states can be found on the IRS website as well.

Roger Harris: [00:39:14] Probably the only thing that was holding us up that we kind of I think we talked about it on our last podcast that we kind of wondered why we were being held up, had to do with a lot of states that gave people money back. Last year they had surpluses and they gave them back and we were sitting there wondering what, well, what do I do with them? Do I have to pay.

Annie Schwab: [00:39:33] Taxable or not?

Roger Harris: [00:39:35] You know, the states had said, but the federal government had not yet spoken. So and they finally spoke. So what did they say?

Annie Schwab: [00:39:43] They spoke and they said that they are nontaxable and there's a handful of states to I want to say there were eight or nine Colorado, California, Maine, Indiana, Illinois, New York. I'm not going to remember them all. But there's there's quite a few. And they did come out and say that those are going to be nontaxable to the to the taxpayers. So now they're saying don't hold up the returns. You know, go ahead and file those returns.

Roger Harris: [00:40:08] Yeah, there's a few states. And it really came down to, as best I can tell, what the state called the payments. If you called it like a disaster payment or a COVID payment or something like that, the IRS just said their tax free. Don't worry about it. Right. Right. Again, I'm going to refer to Georgia because that's where I'm located. Georgia called it a refund of their your state income tax.

Annie Schwab: [00:40:30] Well, it's going to.

Roger Harris: [00:40:31] Be a little different. So basically what the service said, pretty much like your state refund on your normal return, you have to determine whether you received a tax benefit from that rebate. And if you did, then it's taxable, just like your state tax refund would have been taxable. But if you claim the standard deduction or had a huge.

Annie Schwab: [00:40:52] Didn't benefit.

Roger Harris: [00:40:53] Didn't benefit because you were capped at 10,000 and you had more. So you're going to have to do a little calculation in those states to determine if any of those payments are taxable. Pretty much software software should handle it.

Annie Schwab: [00:41:05] Yeah, they'll they'll handle that for you and that way. And it is it's exactly the same calculation as the state refund. You know, Did you benefit? If you did, then, then it'd be taxable in the next year. And if you didn't and you took the standard, then don't worry about it.

Roger Harris: [00:41:21] You know, you'll probably be because your software will know what it calculated for your normal refund to be the year before. But it's not going to know what you got or didn't get. So you'll have to plug.

Annie Schwab: [00:41:30] That in and.

Roger Harris: [00:41:31] Plug that in somewhere. And softwares will either give you a place to do it or you'll have to override or do something and see if there's a tax benefit.

Annie Schwab: [00:41:39] But at least we got an answer. I don't know what we were waiting on for so long.

Roger Harris: [00:41:41] I don't know why we have late, but at least we got it.

Annie Schwab: [00:41:45] Yeah. Yeah, you're right. At least we got it. And we can. We can keep going.

Roger Harris: [00:41:49] No more excuses to wait. Got to move forward.

Annie Schwab: [00:41:52] What else have we got coming up? I believe February 15th was the day for the confirmation hearing. Is that correct?

Roger Harris: [00:42:02] Yes. We are supposed to be starting the process of confirming a new IRS commissioner. He'll go before the Senate. The Senate has to confirm a commissioner. His nomination probably. I'm sure it won't be a pleasant experience for Mr. Werfel as he sits there and gets hammered with all the problems the IRS has had from the beginning. But there's nothing that indicates he won't be confirmed and it'll take a full vote of the Senate. They'll hill the hearings and then the Senate will vote. And it'll be interesting to see what the commission or the new commissioners imprint on the agency will be, particularly given he's coming in with money and hiring authority that some of the last few commissioners didn't have. And every commissioner is going to have what they focus on and what's important to them. And and we'll just have to keep a watchful eye out to see what what he focuses on. And I'm sure it's going to be customer service because.

Annie Schwab: [00:43:00] That has to be right.

Roger Harris: [00:43:01] Yeah. I mean, that's the only thing he doesn't get. I mean, if you don't, you're just going to get hammered by at least the Republicans are going to yell and scream at you if you focus on enforcement. But everybody will yell and scream at you if you don't focus on customer service.

Annie Schwab: [00:43:16] So, yeah, I know. And it's been in the forefront. I mean, we talked about this in a previous podcast. I mean, it's been in the forefront, as, you know, something on the agenda. You know what? How is this spending plan going to improve this? So so maybe we'll maybe we'll get a little bit of insight ahead of time. But but yeah.

Roger Harris: [00:43:35] And some work's already been going on. They haven't waited for the commissioner. So the question is going to be, is he going to come in and change any direction they were going or just jump into what they've already been doing. But, you know, and and like I said, it's going to be interesting to see. He's got he's been in the IRS before, so he's not a complete outsider. So. We'll see.

Annie Schwab: [00:43:57] All right. Anything else in the news recently?

Roger Harris: [00:44:00] Well, in the State of the Union address, President Biden talked about a billionaire's tax.

Annie Schwab: [00:44:06] That's right. That's right.

Roger Harris: [00:44:08] I don't know how many of you do tax returns for billionaires, but I don't. But I.

Annie Schwab: [00:44:14] Don't either. I can't say that I do.

Roger Harris: [00:44:16] Don't think I ever have and probably never will be. And I certainly won't ever be a billionaire. So I'm not going to be personally impacted by this tax change. But what's interesting about it, because it really changes the nature of our tax system is something like this where have yeah, it's not taxing income per se, it's taxing wealth and it's changing.

Annie Schwab: [00:44:36] Like a lot of.

Roger Harris: [00:44:37] Yeah, a lot of them say it may be unconstitutional for that reason. We have an income tax. We don't have a wealth tax, but that's a different story. But basically what, what what this would do each year is at the end of the year. To your point, if I bought a share of stock for $10 and at the end of the year, it's worth 15. Well, historically, unless I sold it for 15, it was a nonevent. This tax would tax that appreciation of $5, even though I didn't sell it.

Annie Schwab: [00:45:02] So 20% to.

Roger Harris: [00:45:04] Yeah. So it's pretty radical now. What is it, a serious proposal? Is it just a political speech? You know, because it's easy to say billionaires, you know, we always hear the billionaires pay less tax than their secretary or something like that.

Annie Schwab: [00:45:16] That's what they. Yeah. Yes, that's exactly right.

Roger Harris: [00:45:19] But but anyhow, so but it is it was part of the State of the Union. It's out there. So again, I don't know that it's going to happen, but it's there.

Annie Schwab: [00:45:29] So you might get a question. Somebody might have heard of it and, you know, want to chat about it during tax season. So who knows?

Roger Harris: [00:45:36] Yeah, there's nothing I don't think there's anything else hanging now. Is there anything you could think of before I kind of take.

Annie Schwab: [00:45:44] A look at hanging? I do. I did see some articles and I've seen it in practice as well that, you know, it's you're coming off of a COVID years where there were a lot of incentives, there were pandemic relief, there were enhanced credits and stimulus checks and all kinds of stuff. And so you're going I mean, the refunds are likely going to be lower just kind of across the board for most individuals, just as a result of kind of comparing from one year to the next. So I would just keep a keep a sensitive eye on how the differences between one year to the next for your taxpayers If you're a tax practitioner because you one, you'll probably get questions on it. And to you know, there might be a couple of disappointed clients coming in and being like, Oh man, what happened to my, you know, my big fat refund that I had last year? So that's I mean, it's just it's just kind of reverting back to where we were. But if you got accustomed to to a nice refund, the last two years might be a little paper shock for you.

Roger Harris: [00:46:48] Yeah. And most of those taxpayers don't really understand why it was bigger last year. They were just happy It was bigger.

Annie Schwab: [00:46:54] Right. Right.

Roger Harris: [00:46:55] So they have no reason to expect it to go down. And and it can be I guess we're going to have to be somewhat kind of counselors to prepare people for this. And yeah, they don't really want a tax explanation. They don't care. They just know that they got 5000 last year and this year they only get two. But hopefully we can keep them from spending the money before they have it.

Annie Schwab: [00:47:16] That's the key, right? Exactly.

Roger Harris: [00:47:17] Because and you should if you know your clients, as I'm sure you do, and their returns are pretty much the same from year to year, other than these credits have gone away or been reduced, you should kind of be able, I think is if you meet with your clients and you see those people who got big refunds last year, I think you probably would be wise to warn them that prepare them in advance. So prepare them. Do is managing expectations.

Annie Schwab: [00:47:44] Exactly.

Roger Harris: [00:47:45] It's better to say, well, you're only going to get 1000 and they get 2000 and then you tell them you're going to get 4000. They only get 2000. They still only got 2000. But they're disappointed. Based on one set of expectations, the expectations build on the other one. So yeah, so spend some time preparing point.

Annie Schwab: [00:48:01] Right? Yeah, Use some talking points. All right. I don't know what else we've got here.

Roger Harris: [00:48:08] I got one other thing. Kind of looking back. It came out today just to kind of give you some idea of the magnitude of what the IRS does every year. This actually came out today. I don't know when they published it, but I saw it this morning. It said that they called them key performance achievements for last year. They processed 260 million federal tax returns. They collected $4.9 trillion of money. The average refund for last year was $3,176. And they collected $72.4 billion in enforcement activities.

Annie Schwab: [00:48:51] So big numbers.

Roger Harris: [00:48:53] Big numbers. And again, this was before they, you know, had any hiring authority. I guess the last thing and this is for this year is those 5000 new people that were hired. You know, we're still hearing, or at least it appears that the practitioner hotline is getting answered quicker. Hopefully, hopefully, hopefully quicker and correctly, we should. I think it's the next week, Presidents next week, Presidents Week or whatever. Yeah, well, it depends on when you're hearing this. So Presidents Day is sometime in February, and supposedly by then all those agents will be up and operating and we should see improved customer service across the board, not just with the practitioner hotline.

Annie Schwab: [00:49:35] Let's hope so.

Roger Harris: [00:49:36] Yeah, let's hope, let's, let's hope.

Annie Schwab: [00:49:38] Exactly.

Roger Harris: [00:49:39] And in this press release, they also said they're working diligently to come up with plans for how to spend this money and improve customer service. So but they do a lot of work. I mean, those numbers are kind of staggering and you have to appreciate that they do. They collect all the money for the government. You know, that's why politicians should be nicer to them because.

Annie Schwab: [00:49:59] Well, that's the whole point. Policy. Piggyback politics. They collide over and over again. And, you know, the IRS kind of just deals with it. The tax practitioners deal with it, Taxpayers deal with it.

Roger Harris: [00:50:12] Yep. We need a good functioning IRS that works the right way and that's it. Anything else?

Annie Schwab: [00:50:20] No, I would just say that keep your head above water and keep going. Keep going. And try to find some time for yourself. If you can remember that you two need a break from time to time. So try to work on a little bit of work life balance if you can. I know I'm probably preaching and everyone shaking their head at me like you don't know what you're talking about. I work in 75 hours this week, but. But hang in. There it is. It is a busy, busy time of year. But we will be back with additional topics. I think we're got the secure act and sort of.

Roger Harris: [00:50:53] Come back and talk about that.

Annie Schwab: [00:50:54] Retirement provisions coming up.

Roger Harris: [00:50:57] Yeah, And again, if if if you like these podcasts, please tell your friends, ask them to join us and just tell them to go. Type in federal tax updates podcast and we'll be back on a regular basis. I think, as Andy said, we're going to do, I think, Skytrax next, right?

Annie Schwab: [00:51:12] I think so. I think so.

Roger Harris: [00:51:14] So about back talking about that and go out and tip your waiters and waitresses.

Annie Schwab: [00:51:19] That's right.

Roger Harris: [00:51:20] Make them smile, go out and, you know, take some time off from work and go out and have a nice meal. Tip your waiter and waitress and get some rest.

Annie Schwab: [00:51:30] Sounds good, Roger.

Roger Harris: [00:51:31] Thanks, as always. Thank you for everybody for joining us for this podcast. Please join us again and tell your friends about it. And we'll see you in a few weeks.

Annie Schwab: [00:51:41] Thanks.

Roger Harris: [00:51:42] Bye.