Electronic Tip Reports

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[REG-104691-97]

RIN 1545-AV28

Electronic Tip Reports

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document proposes to amend the regulations dealing with

the requirement that tipped employees report their tips to their

employer. The proposed regulations permit employers to establish

electronic systems for use by their tipped employees in reporting tips

to the employer. The proposed regulations also address substantiation

requirements for employees using the electronic system.

DATES: Written comments and requests for a public hearing must be

received by April 27, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-104691-97), room

5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-104691-97), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,

Washington, DC. Alternatively,

[[Page 3681]]

taxpayers may submit comments electronically via the Internet by

selecting the ``Tax Regs'' option on the IRS Home Page, or by

submitting comments directly to the IRS Internet site at http://

www.irs.ustreas.gov/prod/tax__regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Karin

Loverud, 202-622-6060; concerning submissions, Evangelista Lee, 202-

622-8452 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)). Comments on the collection of information should be

sent to the Office of Management and Budget, Attn: Desk Officer for the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, DC 20503, with copies to the Internal Revenue

Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of information should be received by

March 27, 1998. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the

proper performance of the functions of the Internal Revenue Service,

including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed

collection of information (see below);

How the quality, utility, and clarity of the information to be

collected may be enhanced;

How the burden of complying with the proposed collection of

information may be minimized, including through the application of

automated collection techniques or other forms of information

technology; and

Estimates of capital or start-up costs and costs of operation,

maintenance, and purchase of service to provide information.

The collections of information in this proposed regulation are in

Sec. 31.6053-1 and Sec. 31.6053-4. This information is required to

conform with the statute and to assist employers and employees in

fulfilling their responsibilities. This information will be used by

employers to establish the amount of income and FICA (or RRTA) taxes to

withhold from the employee reporting the tips. This information will be

used by employees in meeting the substantiation requirements. The

collections of information are mandatory. The likely respondents are

individuals.

Estimated total annual reporting burden: 600,000 hours.

Estimated average annual burden hours per respondent: 2 hours.

Estimated number of respondents: 300,000.

Estimated annual frequency of responses: varies.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless it displays a valid

control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains proposed amendments to the Employment Tax

Regulations (26 CFR part 31) under section 6053(a) of the Internal

Revenue Code (Code). The proposed regulations provide rules permitting

employers to establish electronic systems for use by their tipped

employees in reporting tips to the employer.

In general, under section 6053(a) of the Code, every employee who

receives tips must report the tips to the employer. The tips that must

be reported are those that are wages for purposes of federal income tax

withholding and the Federal Insurance Contributions Act (FICA) and

compensation for purposes of the Railroad Retirement Tax Act (RRTA).

The tips must be reported in a written statement or statements

furnished to the employer on or before the 10th day following the month

in which the tips are received. The Secretary is authorized to

prescribe rules necessary to implement this provision, including the

form and manner of furnishing the statements.

Generally, all cash tips (which include tips that are charged) are

wages (or compensation), with one exception. If the amount of cash tips

received in a calendar month by an employee in the course of any one

employment is less than $20, the cash tips received in that employment

during that month are not wages subject to income tax withholding, FICA

taxes, or RRTA taxes.

For example, A is a full-time tipped employee of X and a part-time

tipped employee of Y. During the month, A received $1,000 in tips in

A's employment with X and $10 in tips in A's employment with Y. The

$1,000 in tips received in the course of employment with X are wages

for income tax withholding and FICA (or RRTA) tax purposes. A must

report the $1,000 in tips to X no later than the 10th day of the

following month. The $10 in tips received in the course of employment

with Y are not wages for those purposes. The $10 are, however, subject

to federal income tax and must be reported as wages by the employee on

Form 4137, Social Security and Medicare Tax on Unreported Tip Income,

which the employee must file with Form 1040, U.S. Individual Income Tax

Return.

Section 31.6053-1(b)(1) prescribes rules for tip statements. The

statement furnished by the employee to the employer must be in writing

and must be signed by the employee. The statement must disclose (1) the

employee's name, address, and social security number; (2) the

employer's name and address; (3) the period for which and the date on

which the statement is furnished; and (4) the total amount of tips

received by the employee during the period that are required to be

reported to the employer.

Under Sec. 31.6053-1(b)(2), no particular form is prescribed for

use in furnishing the tip statement. If the employer does not provide a

form for use by the employee in reporting tips received by the

employee, the employee may use Form 4070, Employee's Report of Tips to

Employer. Twelve blank Forms 4070 and 12 blank Forms 4070A, Employee's

Daily Record of Tips are reproduced in Publication 1244, Employee's

Daily Record of Tips and Report to Employer. (Daily completion of Form

4070A constitutes sufficient evidence of tip income under the

substantiation requirements of Sec. 31.6053-4.) Pub. 1244 is a

convenient pocket-sized document that also includes the basic rules for

reporting tips. Copies of Pub. 1244 are available from the IRS by

calling 1-800-829-3676.

The regulations specifically permit employers to design their own

forms for use by employees in reporting tips. A form used solely to

report tips must include (1) The employee's name, address, and social

security number; (2) the employer's name and address; (3) the period

for which and the date on which the statement is furnished; and (4) the

total amount of tips received by the employee during the period that

are required to be reported to the employer.

In lieu of a special tip reporting form that is used solely for the

purpose of reporting tips, employers may provide for reporting of tips

on regularly used

[[Page 3682]]

forms, such as time cards. The regularly used forms need not include

the employer information, but they must accurately identify the

employee, identify the reporting period, and specify the amount of tips

received. If a regularly used form is used to report tips, the employer

must furnish the employee a statement showing the amount of tips

reported by the employee for the period. This statement must be

furnished no later than shortly after the first wage payment following

the employee's tip report. A payroll check stub or other similar

payroll document may be used for this purpose.

The period covered by a tip statement may not exceed one calendar

month. An employer may require tip statements more frequently, such as

daily, weekly or every pay period, but not less frequently than

monthly. In no event, however, may an employer permit tips received in

one month to be reported after the 10th of the following month. See

section 6053(a). For example, X has a weekly payroll period, beginning

on Sunday and ending on Saturday. X requires that all tip statements be

submitted to X no later than the Monday following each payroll period.

For the payroll period beginning on Sunday, March 30, and ending on

Saturday, April 5, the statements must be furnished on or before

Monday, April 7. If this occurs, the 10th-of-the-month requirement for

March is met. If X's payroll period were biweekly and began on March 30

and ended on April 16 and if X required that all tip statements be

submitted to X no later than the Monday following each payroll period,

the 10th-of-the-month requirement for March would not be met.

A tip statement furnished after this deadline does not meet the

requirements of section 6053(a). The employer is not required to

withhold income, FICA, or RRTA taxes on tips reported after the 10th of

the following month and is not responsible for reporting those tips to

the IRS. The responsibility for reporting and paying the employee

portion of the FICA tax shifts to the employee. The employee must

complete and attach Form 4137, Social Security and Medicare Tax on

Unreported Tip Income, to the employee's federal income tax return.

Moreover, an employee who fails to report tips as required by section

6053(a) is subject to an addition to the FICA tax or the RRTA tax,

whichever is applicable, equal to 50 percent of the employee portion of

the FICA or RRTA tax on those tips.

Section 31.6053-4(a)(1) provides that an employee must maintain

sufficient evidence to establish the amount of tip income received

during a taxable year. Sufficient evidence consists of either a daily

record or, if the employee does not maintain a daily record, other

evidence (such as documentary evidence) that is as credible and as

reliable as a daily record. Nevertheless, if the facts or circumstances

indicate that the employee received a larger amount of tip income, a

daily record or other evidence may not be sufficient evidence.

Section 31.6053-4(a)(2) describes the requirements for a daily

record. In general, the daily record must show the amount of cash and

charge tips received directly from customers or other employees and the

amount of tips, if any, that the employee paid out to other employees

through tip sharing, tip pooling, or other arrangements and the names

of the employees. The daily record must show the date on which each

entry is made. Each entry must be made on or near the date the tip

income is received. An entry made when the employee has full present

knowledge of those receipts and payments satisfies this requirement.

Section 31.6053-4(a)(3) describes documentary evidence. Documentary

evidence consists of copies of any documents that contain amounts added

as a tip to a check by a customer or amounts paid by a customer for

food or beverages with respect to which tips generally would be

received. Examples of documentary evidence are copies of restaurant

bills, credit card charges, or charges under any other arrangement

containing amounts added by the customer as a tip.

Explanation of Provisions

Electronic Tip Statements

No provision currently exists for employees to furnish tip

statements to employers in a form other than on paper. The proposed

regulations would permit an employer to adopt a system under which some

or all of the tipped employees of the employer would furnish their tip

statements electronically. Therefore, the employer could include in its

electronic system any tipped employee or employees working in any

location or locations.

The proposed regulations set forth requirements for employers who

wish to establish electronic systems for employees to use to furnish

tip statements to their employers. The proposed regulations apply only

to tip statements required by section 6053(a) and not with respect to

any other Code sections.

An employer that chooses to establish an electronic tip reporting

system may select the type or types of electronic systems (such as

telephone or computer) to be used by its employees. The system must,

however, ensure that the information received is the information

transmitted by the employee and must document all occasions of access

that result in the transmission of a tip statement. The design and

operation of the electronic system, including access procedures, must

make it reasonably certain that the person accessing the system and

transmitting the tip statement is the employee identified in the

transmission. In the event of an examination, the employer must supply

a hard copy of the electronic statement to the IRS upon request.

The electronic tip statement must contain exactly the same

information that is required to be reported on a paper tip statement

and must contain the employee's electronic signature. The electronic

signature must identify the employee furnishing the electronic tip

statement and authenticate and verify the transmission. An electronic

signature can be in any form that satisfies the foregoing requirements.

An electronic signature has the same effect as a signature written on a

paper tip statement. See sections 6061, 6064, and 6065 of the Code.

Pursuant to Rev. Rul. 71-20 (1971-1 C.B. 392), all machine-sensible

data media used for recording, consolidating, and summarizing

accounting transactions and records within a taxpayer's ADP system are

records within the meaning of section 6001 and Sec. 1.6001-1. The

record retention requirements contained in Rev. Proc. 91-59 (1991-2

C.B. 841) (or any revenue procedure updating Rev. Proc. 91-59), dealing

with automatic data processing systems, apply to electronic tip

reporting systems.

The proposed regulations provide that an employee maintains

sufficient evidence to establish the amount of tip income received by

the employee during a calendar month through a daily record (as

described in Sec. 31.6053-4(a)(2)) if the employee both reports tips on

a daily basis through an electronic system that otherwise meets the

substantiation requirements of the regulations and receives from the

employer a hard copy of a daily record based on those entries for the

period.

Employee Substantiation Requirements

Because the proposed regulations expand the permissible array of

employer-designed reporting systems to include electronic methods,

employers will be providing a statement to employees of the tips

reported consistent with the existing requirements of Sec. 31.6053-

1(b). The

[[Page 3683]]

Treasury and the IRS recognize that many of these systems may capture

tip reporting on a very current basis (e.g., point-of-sale or end-of-

shift). Thus, the information in these systems offers a reasonable

substitute for a daily record maintained by the employee if the

employer's system provides the employee with a printout that would

satisfy the current substantiation requirements of Sec. 31.6053-4.

Thus, these proposed regulations provide that, if the employer, at

its option, provides employees with a copy of the daily record based on

entries made by the employee in the system and otherwise satisfying the

substantiation requirement of Sec. 31.6053-4, the entry in the

electronic system on a daily (or more frequent) basis by the employee,

together with the daily record based on these entries provided by the

employer, will satisfy the substantiation requirements of Sec. 31.6053-

4. For example, assume an employee enters tips in the employer's

electronic system at the end of each shift, but does not provide the

employer with a signed paper record of these tips. After the end of

each weekly payroll period, the employer provides the employee with a

paper record that includes all the information specified in

Sec. 31.6053-4(a)(2) and that shows the total amount of tips reported

for each day during the period based on the employee's entries. If the

employee maintains this employer generated paper record, the

substantiation requirements of Sec. 31.6053-4 are satisfied.

The Treasury and the IRS particularly invite comment on whether the

proposed regulations should be modified to reflect ways in which these

systems may permit further reduction in paper reporting for either the

employer or employee while retaining provisions for appropriate and

timely substantiation of income.

Railroad Retirement Tax Act Provisions

The tip reporting provisions of section 6053(a) apply to tips that

are either wages for income tax withholding and Federal Insurance

Contributions Act (FICA) purposes or compensation for Railroad

Retirement Tax Act (RRTA) purposes. The proposed regulations would

clarify that the regulations under section 6053(a) apply to tips that

are compensation as well as to tips that are wages.

Proposed Effective Date

The revisions and additions in the proposed regulations apply to

tips required to be reported to the employer after these regulations

are published as final regulations in the Federal Register. However,

taxpayers may rely on the guidance in these proposed regulations for

prior periods.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It also has been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these regulations.

It is hereby certified that the collections of information in these

regulations will not have a significant economic impact on a

substantial number of small entities. The collection of information in

Sec. 31.6053-1 is imposed solely on individuals, not on any small

entities, and the regulations provide flexibility to employees who must

provide the information required by statute, thereby reducing burden.

With respect to the collection of information in Sec. 31.6053-4, the

certification is based on the expectation of the IRS that most

businesses that choose to implement the electronic tip reporting

provisions will be larger businesses with many employees and

sophisticated computer systems. Moreover, because the provision is

wholly elective, any small business that would be adversely impacted

may choose not to use electronic tip reporting. Finally, the Service

expects that for those small entities that choose to implement the

provision, the use of electronic tip reporting will reduce overall

burden by reducing paper collections. Therefore, a Regulatory

Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C.

chapter 6) is not required.

Pursuant to section 7805(f) of the Code, this notice of proposed

rulemaking will be submitted to the Chief Counsel for Advocacy of the

Small Business Administration for comment on its impact on small

business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight copies) that are submitted timely (in the manner described in

the ADDRESSES portion of this preamble) to the IRS. All comments will

be available for public inspection and copying.

A public hearing may be scheduled if requested in writing by any

person that timely submits written comments. The IRS will also consider

requests for remote teleconference sites as part of the public hearing.

If a public hearing is scheduled, notice of the date, time, and place

(including teleconference, if any) for the hearing will be published in

the Federal Register.

Drafting Information

The principal author of these proposed regulations is Karin

Loverud, Office of the Associate Chief Counsel (Employee Benefits and

Exempt Organizations), IRS. However, other personnel from the IRS and

the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad

retirement, Reporting and recordkeeping requirements, Social security,

Unemployment compensation.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 31 is proposed to be amended as follows:

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Paragraph 1. The authority citation for part 31 continues to read

in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 31.6053-1 is amended as follows:

1. Paragraph (a) is revised.

2. The introductory text of paragraph (b)(1) is revised.

3. The last sentence of paragraph (b)(1)(iii) is revised.

4. Paragraph (b)(2) is revised.

5. Paragraph (c) is revised.

6. Paragraph (d) is added.

The revisions and additions read as follows:

Sec. 31.6053-1 Report of tips by employee to employer.

(a) Requirement that tips be reported--(1) In general. An employee

who receives, in the course of employment by an employer, tips that

constitute wages as defined in section 3121(a) or section 3401, or

compensation as defined in section 3231(e), must furnish to the

employer a statement, or statements, disclosing the total amount of the

tips received by the employee in the course of employment by the

employer. Tips received by an employee in a calendar month in the

course of employment by an employer that are required to be reported to

the employer must be reported on or before the 10th day of the

following month.

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Thus, for example, tips received by an employee in January 1998 are

required to be reported by the employee to the employer on or before

February 10, 1998.

(2) Cross references. For provisions relating to the treatment of

tips as wages for purposes of the Federal Insurance Contributions Act

(FICA) tax under sections 3101 and 3111, see sections 3102(c),

3121(a)(12), and 3121(q) and Secs. 31.3102-3 and 31.3121(a)(12)-1. For

provisions relating to the treatment of tips as wages for purposes of

the tax under section 3402 (income tax withholding), see sections

3401(a)(16), 3401(f), and 3402(k) and Secs. 31.3401(a)(16)-1,

31.3401(f)-1, and 31.3402(k)-1. For provisions relating to the

treatment of tips as compensation for purposes of the Railroad

Retirement Tax Act (RRTA) tax under sections 3201 and 3221, see section

3231(e) and Sec. 31.3231(e)-1(a).

(b) * * * (1) In general. The statement described in paragraph (a)

of this section can be provided on paper or transmitted electronically.

The statement must be signed by the employee and must disclose:

* * * * *

(iii) * * * If the statement is for a period of less than 1

calendar month, the beginning and ending dates of the period must be

included (for example, January 1 through January 8, 1998).

* * * * *

(2) Form of statement--(i) In general. No particular form is

prescribed for use in furnishing the statement required by this

section. The statement may be furnished on paper or transmitted

electronically. An electronic system and all tip statements generated

by that system must meet the requirements of paragraph (d) of this

section. If the employer does not provide any other means for the

employee to report tips, the employee may use Form 4070, Employee's

Report of Tips to Employer.

(ii) Single-purpose forms. A statement may be furnished on an

employer-provided form. The form may be on paper or in electronic form.

An employer that provides a paper form must make blank copies of the

form readily available to all tipped employees. Any form, whether paper

or electronic, provided by an employer for use by its tipped employees

solely to report tips must meet all the requirements of paragraph

(b)(1) of this section.

(iii) Regularly used forms. Instead of requiring that tips be

reported as described in paragraph (b)(2)(ii) of this section on a

special form used solely for tip reporting, an employer may prescribe

regularly used forms for use by employees in reporting tips. A

regularly used form may be on paper (such as a time card or report) or

in electronic form, must meet the requirements of paragraph (b)(1)(iii)

and (iv) of this section, must contain identifying information that

will ensure accurate identification of the employee by the employer,

and is permitted to be used only if the employer furnishes the employee

a statement suitable for retention showing the amount of tips reported

by the employee for the period. The employer statement may be furnished

when the employee reports the tips, when wages are first paid following

the reporting of tips by the employee, or within a short time after the

wages are paid. The employer may meet this requirement, for example,

through the use of a payroll check stub or other payroll document

regularly furnished by the employer to the employee showing gross pay

and deductions. In the case of electronic tip reports, the employer

statement may be furnished on a daily, weekly, monthly or on a regular

payroll basis (if not less frequent than monthly).

(c) Period covered by, and due date of, tip statement--(1) In

general. A tip statement furnished by an employee to an employer may

not cover a period greater than 1 calendar month. An employer may,

however, require the submission of a statement in respect of a

specified period of time, for example, on a weekly or biweekly basis,

regular payroll period, etc. An employer may specify, subject to the

limitation in paragraph (a) of this section, the time within which, or

the date on which, the statement for a specified period of time should

be submitted by the employee. For example, a statement covering a

payroll period may be required to be submitted on the first (or second)

day following the close of the payroll period. A statement submitted by

an employee after the date specified by the employer for its submission

nevertheless will be considered as a statement furnished pursuant to

section 6053(a) and this section if it is submitted to the employer on

or before the 10th day following the month in which the tips were

received.

(2) Termination of employment. If an employee's employment is

terminating, the employee must furnish a tip statement to the employer

when the employee ceases to perform services for the employer. A

statement submitted by an employee after the date on which the employee

ceases to perform services for the employer will be considered as a

statement furnished pursuant to section 6053(a) and this section if the

statement is submitted to the employer on or before the earlier of the

day on which the final wage payment is made by the employer to the

employee or the 10th day following the month in which the tips were

received.

(d) Requirements for electronic systems--(1) In general. The

electronic system must ensure that the information received is the

information transmitted by the employee and must document all occasions

of access that result in the transmission of a tip statement. In

addition, the design and operation of the electronic system, including

access procedures, must make it reasonably certain that the person

accessing the system and transmitting the statement is the employee

identified in the statement transmitted.

(2) Same information as on paper statement. The electronic tip

statement must provide the employer with all the information required

by paragraph (b)(1) of this section.

(3) Signature. The electronic tip statement must be signed by the

employee. The electronic signature must identify the employee

transmitting the electronic tip statement and must authenticate and

verify the transmission. For this purpose, the terms ``authenticate''

and ``verify'' have the same meanings as they do when applied to a

written signature on a paper tip statement. An electronic signature can

be in any form that satisfies the foregoing requirements.

(4) Copies of electronic tip statements. Upon request by the

Internal Revenue Service (IRS), the employer must supply the IRS with a

hard copy of the electronic tip statement and a statement that, to the

best of the employer's knowledge, the electronic tip statement was

filed by the named employee. The hard copy of the electronic tip

statement must provide the information required by paragraph (b)(1) of

this section, but need not be a facsimile of Form 4070 or any employer-

designed form.

(5) Record retention. The record retention requirements dealing

with automatic data processing systems apply to electronic tip

reporting systems.

Par. 3. Section 31.6053-4 is amended as follows:

1. A sentence is added to paragraph (a)(1) after the third

sentence.

2. A sentence is added to paragraph (a)(2) after the fourth

sentence. The additions read as follows:

Sec. 31.6053-4 Substantiation requirements for tipped employees.

(a) * * *

(1) * * * The Commissioner may by revenue ruling, procedure or

other

[[Page 3685]]

guidance of general applicability provide for other methods of

demonstrating evidence of tip income. * * *

(2) * * * In addition, an electronic system maintained by the

employer that collects substantially similar information as Form 4070A

may be used to maintain such daily record, provided the employee

receives and maintains a paper copy of the daily record. * * *

* * * * *

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 98-1548 Filed 1-23-98; 8:45 am]

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