What is ATIP?
The Attributed Tip Income Program (ATIP) is a new voluntary tip reporting program that promotes tip income reporting and reduces industry record keeping burdens. ATIP is a three year pilot program effective January 1, 2007.
What businesses can participate in ATIP?
Food or beverage employers with tipped employees may participate. Participation is on an establishment by establishment basis and each establishment must meet two basic requirements. First, at least 20% of the establishment’s gross receipts must be charged receipts with charged tips. Second, at least 75% of the establishment’s tipped employees must sign employee participation agreements. If both requirements are met, the employer may elect to participate in ATIP. The employer must meet both requirements each year to continue ATIP participation.
How can a business elect to participate in ATIP?
Employers use the Form 8027 to elect to participate in ATIP on an annual basis. Employers may have some establishments that participate in ATIP and some that do not. Employers are required to file all necessary Forms 8027 according to the Form 8027 instructions, and to elect ATIP participation for an establishment, the employer must send a copy of the Form 8027 with the ATIP participation box checked to:
Internal Revenue Service
201 West RiverCenter Boulevard
Stop 5701-G
Attention Employment Tax/ATIP Coordinator
Covington, KY 41011
Establishments not required to file Form 8027 (generally establishments with less than 10 employees) should complete lines 1 through 5 of the Form 8027, check the ATIP participation box and mail to the above address.
How is ATIP different from other tip reporting programs?
Unlike TRAC and TRDA, ATIP does not require the employer to meet with the IRS prior to participation. Another difference is that ATIP provides a formula that the participating employer uses to determine its tip rate. This “formula tip rate” is basically the establishment’s tip rate for charged sales minus two percentage points.
Employers compute the formula tip rate using a charged tip rate that is based upon the data reported (or to be reported) on the establishment’s Form 8027 for the preceding calendar year. For example, an employer that elects to participate for the 2007 calendar year uses information from its 2006 Form 8027 to calculate the tip rate. For payroll periods in January and February of 2007, prior to filing Form 8027, the employer may compute the formula tip rate using information from the Form 8027 for the calendar year two years before the year of participation. That means for participation in 2007 the employer may use data from the 2005 Form 8027 to determine the formula tip rate for payroll periods in January and February, 2007.
May employers that currently participate in an existing tip program elect to switch to ATIP?
Yes. Any food or beverage employer can participate in ATIP, as long as the establishment meets both participation requirements. However, the employer’s election to participate in ATIP supersedes and revokes all existing tip compliance agreements between the employer and the Service with respect to the establishment.
How does an employer attribute tips to employees?
The employer must select a period for computing the total tip amount and attributing tips to all tipped employers. The period may not be any longer than one month.
As of the last day of the period, the employer computes the total tip amount to be attributed by multiplying the total gross receipts from food and beverage sales for the period by the formula tip rate. The employer then attributes the total tip amount to all tipped employees without regard to whether the tipped employee is a participating or nonparticipating employee. Employers must attribute tips no later than the 10th day following the last day of the period for which the total tip amount is computed.
Employers may use any reasonable method to attribute the total tip amount to all tipped employees. An attribution method is reasonable if it is applied consistently to similarly situated employees and approximates the relative amounts of tips received by different categories of similarly situated employees.
How are attributed tips treated?
In general, attributed tips are treated as wages for purposes of withholding, reporting and payment of FICA, FUTA and income tax withholding. The employer must treat tips attributed to the participating employees as if each such employee had reported those tips to the employer. Thus, the employer must comply with the applicable legal requirements to withhold, pay, and report FICA, FUTA and income tax. Attributed tips are also reported as wages on the Forms W-2 furnished to participating employees. Tips attributed to nonparticipating employees are not treated as wages for FICA, FUTA and income tax withholding purposes and are not reported on the Forms W-2 furnished to nonparticipating employees. Nonparticipating employees must report the amount of tips actually received to the employer, and the employer must treat the amount of reported tips as wages.
What does an employer do if an employee also reports tips to his employer in addition to the attributed tips in the same calendar year?
If an employee reports actual tips to the employer for any payroll period, the employer must provide the employee a statement specifying which amounts in the W-2 are from attributed tips. The actual tips are also treated as wages.
What records should a participating employer maintain?
For each year the employer participates in ATIP the employer shall maintain the following records for each establishment:
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Copies of the signed employee participation agreements
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Each tipped employee’s name, address, social security number, date hired, status as directly or indirectly tipped, any reported tips, amount of attributed tips, and any other wages paid
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Tip records including all information used to compute the total tip amount for the establishment, to determine the attribution method used, and to attribute tips to the tipped employees for each period, gross receipts subject to food or beverage tipping, all charged receipts showing tips, all employee reported tips and charge receipts or electronic charge records
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A copy of the Form 8027 electing to participate in ATIP
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A copy of any letter the establishment sent to the IRS terminating participation in ATIP
What records must be furnished to the IRS?
The following records must be furnished to the IRS for each year an establishment participates in ATIP:
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Description of the attribution method;
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An annual report providing each tipped employee’s name, address, and social security number, status as a participating or nonparticipating employee, and the amount attributed to each tipped employee; and
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Amount reported to each tipped employee as Social Security tips on Form W-2.
This information must be sent to the IRS on or before March 31 for the preceding calendar year.
What benefits does ATIP provide an employer?
The IRS will not initiate tip examinations of a participating food or beverage establishment as long as the establishment satisfies all ATIP requirements. Any section 3121(q) notice and demand issued to the employer with respect to a participating establishment relating to any period during which the establishment participates in ATIP will be based either on amounts reflected on a Form 4137, Social Security and Medicare Tax on Unreported Tip Income, filed by an employee with Form 1040 or Form 885-T, Adjustment of Social Security Tax on Tip Income Not Reported to Employer, prepared at the conclusion of an employee tip examination.
Additionally, participating establishments will not be required to allocate tips to participating employees. Employers may still have to allocate tips to nonparticipating employees under the allocation rules.
Employers need 75% of their eligible employees to participate in ATIP, which employees are eligible?
What should the employee participation agreement include?
The employee participation agreement must describe the ATIP requirements and benefits. It must also specify that employees agree to report at least the amount of attributed tips reported on their Form W-2 on their tax return. Revenue Procedure 2006-30 includes a model agreement that employers may use.
Are benefits provided to participating employees?
Yes. Under ATIP participating employees are not required to keep a daily tip log or to report actual tips to their employers. Additionally, the IRS will not examine a participating employee’s tip income earned at the participating establishment, unless the employee reports on the employee’s tax return an amount of tips less than the amount reported to the employee on the employee’s Form W-2.
What happens if a business or an employee does not meet all of their responsibilities under ATIP?
Employers and employees will lose ATIP benefits if they fail to comply with all ATIP requirements. An employer that loses the benefits of ATIP must notify affected employees that the employer will no longer attribute tips and employees must begin reporting the tips to the employer and keep tip records as required under the law.
May an employer or employee stop participating in ATIP during the calendar year?
Yes. Employers must notify the IRS in writing that an establishment will no longer participate in ATIP.
An employee may revoke participation in ATIP either by notifying the employer in writing or by reporting actual tips to the employer in an amount less than the attributed tips. An employee that revoke’s participation must report tips to the employer for the remainder of the calendar year.
What other responsibilities does a participating employer have under ATIP?
Employers must make a good faith effort to encourage employee participation and should periodically review the level of employee participation.
What will the IRS do to ensure employers and employees are satisfying the ATIP requirements.?
The IRS may conduct compliance reviews to ensure participating employers and employees are meeting their obligations under their ATIP agreements.
When do employers start complying with ATIP if they elect ATIP on Form 8027?
Employers must begin participating in ATIP at the beginning of the calendar year with the first payroll period ending on or after January 1. Employers electing to participate in ATIP for 2008 will begin attributing tips with the first payroll period ending on or after January 1, 2008. ATIP participation is on an annual basis; therefore, employers may not begin participation in the middle of the year.
Is there additional information available about ATIP?
Details about ATIP are in Rev. Proc. 2006-30 which can be viewed at the Market Segment Understandings (MSU) page.
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