Electronic Tip Reports

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 31 [REG-104691-97] RIN 1545-
AV28

TITLE: Electronic Tip Reports

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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, 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
�31.6053-1 and �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 hoU.S.
Estimated average annual burden hours per respondent: 2 hoU.S.
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 �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 �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 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
daily, weekly or every pay period, if 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 �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 �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 �31.6053-1(b). The 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 �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 �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 �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 �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
�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 �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 �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:

�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.

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 ��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 ��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 �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:

�31.6053-4 Substantiation requirements for tipped employees.

(a) * * *

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

*****

Deputy Commissioner of Internal Revenue

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