An EmTRAC Whose Time Has Come
By John Marshall
As of January 1, 2012 the IRS no longer offered a tip procedure that would protect an employer and its employees from audit. The IRS ATIP Procedure was a trial that was extended once, but whose sunset occurred 12/31/2011. All that remains is the IRS TRAC procedure, and while it protects the employer, it does not protect the employees.
As an establishment owner, former (and loyal) ATIP follower, and author of GrataSoft Tip and Gratuity Management software, I was growing concerned last summer that the IRS had still not announced a replacement procedure to ATIP. I therefore set out to design my own!
History: TRAC requires quarterly staff training and quite an elaborate gathering of sales, payment, and tip-out data on one report that is provided to each employee. TRAC sets no minimum tip declaration requirements and as a consequence does not protect the employees from audit. ATIP on the other hand set a minimum tip declaration threshold for each establishment based on it's charge tip reporting for its prior year. While some considered this excessive, it did approximate the actual tips a server might earn at any particular location. These mechanics allowed all directly tipped employees to also enjoy tip audit immunity.
ATIP has sunset, but is not dead. Looking to extend the benefits of ATIP without a replacement plan, I concocted my own plan under an IRS sanctioned program called EmTRAC. I essentially took all the advantages of ATIP and dropped those elements that were ineffective.
2012: Even if you haven't seen the movie, starting this year, all charged sales processed for an establishment will be reported to the IRS. This could be the end of the world for some operators. Any establishment that has not been filing an IRS Form 8027 should do so immediately for 2011, and if previous reports have been inaccurate, sharpen your pencils right away! It won't take much for the IRS to estimate charged tips with a charged receipt report in their hand. After that, cash tips are just a calculator away.
EmTRAC 2.0: I knew that the IRS was keen on seeing "ALL" charged tips reported, and with the new processor reporting requirements I knew this was "long-hanging fruit", so I made 100% charged tip reporting the first component of my EmTRAC design. Cash tips are nearly impossible to have reported accurately, so the simplest method is to use an estimate based on cash sales. ATIP estimated cast tips at the same rate as charged tips (likely why it never gained much of a following). With a POS and a Tip and Gratuity Management system it's easy to separately attribute cash and charged tips. I consulted with my staff, looked at past reporting, and determined that cash tips can regularly (and accurately) be estimated at 30% lower than the charged tip rate. In other words, for the same sales with a charged tip of 20%, one would expect a cash tip of just 14% (30% lower). The IRS agreed and approved my plan tip design ... but with some other administrative requirements.
Back of House: Along with the tip attribution method noted above, one cannot ignore the significant amount of cash that gets shared with indirect (support) staff in the form of tip-outs. The directly tipped staff also do not want to be left holding the entire tax obligation on the attributed tips, so we need to implement a method for tracking and reporting tip-outs. Luckily there is a fantastic solution by GrataSoft that does just this. In fact, not only does GrataSoft provide the tools to track inter-employee tip-outs, but it also allows the payment of Gratuities (service charges) as wages (not as tips) which is also an IRS directive and EmTRAC requirement. To accomplish this, employees need the ability to "allocate" a portion of their gratuity (service charge) so that these do not need to be converted to cash for distribution. These net flows of tips actually distributed, or gratuities to be paid are combined with tip attributions so that each person pay their actual fair share.
Charge Rate: ATIP used the charged rate from the establishment's previous calendar year (from the IRS 8027). While this provided an easy-access number, it often reflected a value that did not match the current pay period or job function. As an example, lunch tips tend to be far lighter than weekend dinner tips. Under the ATIP procedure, everyone declared tips based on the same rate. This essentially meant that the lunch severs paid a tip rate higher than they should have, and the weekend dinner servers less (subsidized by their lunch counterparts). I don't need to tell other operators that it is already difficult to staff lunch positions, let alone if they are unfairly attributed tips. The solution was to have the IRS approve current-period rates, even those by each server by task. GrataSoft does this automatically by computing the charged tip rate for each server by the tasks they performed. So a waiter working all lunches would have their own charged tip rate for that task, separate and apart from their colleagues. Staff who work multiple tasks would have their own separate rates for each task, and tips would would attributed to them based on their own pay-period performance. Of course these values would be lowered by the actual tip-outs that they provided their supporting co-workers. 100% fair, 100% equitable.
EmTRAC is born. Yes the EmTRAC plan design that I have described above does exist and has been approved by the IRS so that it provides both employers and their staff with audit immunity. If you would like to use this plan design for your own operations I have placed the agreement (that needs to be sent to the IRS) in the TipCompliance TOOLS section, as well as the employee agreement that allows you as an operator to "attribute tip to them" and they to agree or opt-out.
Value Added: Please read my other article on the value of tip-outs to protect against state wage and hour violations. The tip-out tracking functionality in GrataSoft could be the difference between a hand shake and a 5-digit penalty. It's important to remember that tip compliance is a single topic that has multiple prongs, each with an important value chain. With the right tools, the process can be reduced to minimal plan administration, but with protection value exponentially greater. I invite all operators to adopt tip compliance for themselves first, and everyone else as a side benefit.
Please come attend my panel at the National Restaurant Association show in Chicago May 5-8, 2012. Time and place TBD.
Mr. Marshall is the owner of Main Street Gourmet Eatery and Bakery, Main Street Fine Catering, and Main Street Euro-American Bistro and Bar. He is president of GrataSoft Solutions, developer and publisher of Grata Restrateur and Grata Persona; patent pending solutions for implementing, tracking and managing tip policy, including IRS TRAC, TRDA and EmTRAC Tip Program compliance automation for businesses and individuals. For more information, please visit GrataSoft.com.
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