What Is a Tip Rate Determination Agreement?

A Tip Rate Determination Agreement (TRDA) is a formal, voluntary arrangement between an employer and the Internal Revenue Service (IRS). It is part of a broader initiative to improve tax compliance for tipped workers through voluntary agreements rather than audits. While the TRDA has been a long-standing program, the IRS has introduced the Service Industry Tip Compliance Agreement (SITCA) program, which is intended to eventually replace both the TRDA and Tip Reporting Alternative Commitment (TRAC) programs.

The core purpose of a TRDA is to establish a predetermined, fair tip rate for different job roles. This simplifies tip reporting for both parties, making the process more predictable and providing a clear framework for tax compliance.

How the Tip is Determined

The tip rate established under a TRDA is the result of a detailed analysis and negotiation process between the employer and the IRS. The goal is to arrive at a rate that accurately reflects what employees in specific roles earn. This process relies on the business’s historical data, and the IRS works with the establishment to analyze its financial records to project the likely tip income.

One common method involves reviewing a sample of the business’s charge slips to calculate the average tip percentage from customers. Another approach involves analyzing past records of total sales and the aggregate amount of tips reported by employees.

This analysis also considers factors that can influence tip amounts, such as the type of service, time of day, or specific shift. The final rate is formalized after discussions and is documented in the formal agreement.

Required Information and Documentation for the Agreement

To enter into a TRDA, an employer must gather a comprehensive set of documents. This information provides the IRS with a financial picture of the business and its tipping practices. Key documents include detailed records of gross receipts showing the total revenue.

An employer will also need to produce records of all charge sales and the corresponding tips. Payroll records are also required, listing all employees, their Social Security numbers, job titles, and total hours worked.

The Process of Establishing an Agreement

The process begins when an employer contacts the IRS Tip Program to express interest, which starts the review procedure. The IRS then assigns an agent to the case as the employer’s primary contact.

The agent reviews the submitted information, analyzes tipping patterns, and works with the employer to negotiate appropriate tip rates based on the establishment’s data.

After the rates are agreed upon, the IRS drafts the formal TRDA, outlining all terms and obligations. The agreement is put into effect when signed by both parties and requires that at least 75% of tipped employees sign a Tipped Employee Participation Agreement (TEPA).

Employer Obligations Under a TRDA

After a TRDA is signed, the employer assumes several ongoing responsibilities. A primary duty is to educate all tipped employees about the agreement’s terms, their specific tip rates, and their reporting responsibilities. The employer must also:

• Apply the determined rate to calculate and withhold federal income, Social Security, and Medicare taxes.
• Include the reported tips on each employee’s Form W-2.
• Maintain all records as stipulated in the agreement.
• File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, with the IRS annually.
• Provide the IRS with the details of any employee who fails to report tips at or above the agreed-upon rate.