Tip Agreements for Native American Tribal Casinos

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Presenters

• Laurie Brunette Tip Analyst, Compliance and Program Management Office of Indian Tribal Governments • Aletha Bolt Indian Tribal Government Specialist Office of Indian Tribal Governments

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Overview

• Two types of tip agreements

• Benefits to Indian Tribal casinos

• Benefits to employees

• How to determine tip rates

• How to set up an “actual” tip rate

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What is a Gaming Tip Agreement?

• Voluntary written agreement between the IRS and the casino

• Sets tip rates for the various tipped occupational categories in the casino

• Offers the casino & casino employees freedom from IRS tip audits

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What’s the Purpose of a Tip Agreement?

• Ensure maximum employee compliance with federal tip reporting requirements

• Minimize the burden on the casino for IRS tip compliance programs

• Reduce enforcement costs

• Avoid disputes under Code Section 3121(q)

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IRC Section 3121(q) – 1 of 2

• Employer is responsible for its share of FICA taxes on tips including tips not reported by the employee

• Allows the IRS to assess the employer’s share of FICA against the employer for amounts determined as unreported tips

IRC Section 3121(q) – 2 of 2

• Creates contingent liabilities based on:

• Tip audit of the employer

• Tip audit of the employee

• Tips employee reported on Form 1040 but didn’t report to the employer

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Tip Agreements - Types

• Gaming Industry Tip Compliance Agreement (GITCA)

• Tip Rate Determination Agreement for the Gaming Industry (TRDA)

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Employer Benefits – 1 of 3

• No tip audit of the casino for the period the Tip Agreement is in effect

• No contingent liabilities under IRC section 3121(q) on any participating employees

• Minimal burden on the casino due to traditional IRS tip compliance programs

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Employer Benefits – 2 of 3

• Accurate tip data provides: • Employee compliance • Information on customer satisfaction

• Unrealistically low tips for a venue may result from: • Problems with internal data • Customer dissatisfaction with employees or

venue • Employees not complying with internal

procedures

Employee Benefits – 3 of 3

• No tip exam of the employee while participating in a tip agreement

• Increased financing approval • Increased benefits linked to income:

• 401(k) • Social Security/Medicare Benefits • Disability • Workman’s Compensation • Unemployment Compensation

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Tip Agreement Features – 1 of 5

• Tip agreements are voluntary

• Tip rates are determined for each tipped category

• IRS agrees not to do a tip audit of the casino or participating employees for the period the tip agreement is in effect

Tip Agreement Features – 2 of 5

• Employer agrees to file:

• Annual reports on tipped employees, and

• Either: • Form 8027, Employer’s Annual Information

Return of Tip Income & Allocated Tips for TRDA; or

• Specific Food & Beverage information for GITCA

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Tip Agreement Features – 3 of 5

• Employer agrees to provide certain employee records upon request similar to annual report data

• Employer must keep records of toke & chip cashing at the cages and a list of tip splits

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Tip Agreement Features – 4 of 5

• Employer may terminate at any time by giving written notice

• IRS may terminate by giving written notice if employee participation rate is below a specified level at the end of calendar year

Tip Agreement Features – 5 of 5

• May be terminated if either party fails to comply with any part of the agreement’s material provisions

• If terminated, both parties remain mutually obligated to comply until the termination date

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GITCA vs. TRDA – 1 of 2

GITCA TRDA

Term of Agreement 3 years; renewable every 3 years

No specified expiration date

Effective Date As agreed in GITCA 1st day of calendar quarter after signed

Forms 8027 Only relevant data submitted

Required

Annual Report On all tipped employees

Only on nonparticipating employees

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GITCA vs. TRDA – 2 of 2

GITCA TRDA Required Employee Participation

50% of eligible employees

75% of eligible employees

Tip Rates Required All tipped occupations except Housekeeping

All tipped occupations

Participating Employees

No retroactive audit unless participation in agreement declined previously

No guarantee of retroactive relief

Termination of Agreement

At any time by joint agreement or less than 50% participation

At any time by casino or less than 75% participation

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Tip Rates – 1 of 4

• Determined for each tipped occupational category

• May:

• vary by shift or venue

• be changed if both parties concur

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Tip Rates – 2 of 4

• Rates required for all tipped occupational categories in the casino except:

• Tips regularly & routinely < $20 a month

• Housekeeping (GITCA)

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Tip Rates – 3 of 4

• Casino Tipped Occupational Categories may include, but aren’t limited to: • Food & Beverage (Food Servers, Bussers, Bartenders,

Barbacks, Refreshment/Cocktail Servers, Hostesses) • Dealers (Poker, Blackjack, Pit Dealers) • Cage & Slots • Keno & Bingo • Race & Sportsbook • Valet & Shuttle Drivers • Showroom & Gift Shop • Bell Person & Security • Salon & Golf Course

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Tip Rates – 4 of 4

• Goal is to set appropriate and reasonable rates for each tipped category based on available data, the facts and circumstances

• Assigned ITG Specialist works with the casino to provide guidance on acceptable methods, formulas, & procedures to determine rates for each category

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Tip Rates - Types

• Actual

• Pool/Split or Hold Your Own

• Average

• $ per hour

• % of sales

• $ amount per drink

• any other accurate basis of measurement

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Tip Rates – Actual – 1 of 3

• The best and simplest rates to develop

• Not impacted by economic fluctuations & accurately reflect the tips the employee received

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Tip Rates – Actual – 2 of 3

• Require strong internal controls & detailed procedures that track the tip from the moment the employee receives the tip until the employer reports it in the employee’s pay

• Provides no opportunity for the tip to be excluded from payroll

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Tip Rates – Actual – 3 of 3

Example of Poker Dealer with

“Hold Your Own” Actual Rates

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Tip Rates – Actual Pool/Split – 1 of 4

• Tips are pooled and split among the employees.

• Tips pooled by shift or daily; then split generally based on hours worked.

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Tip Rates – Actual Pool/Split – 2 - 4

• Record of tip splits goes to payroll to include the correct tip amount in the employee’s pay

• Employees can’t use an hourly rate; they must report actual tips received

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Tip Rates – Actual Pool/Split – 3 - 4

• Required for tip pools:

• Strong internal controls

• Reconciliation of total tips reported to payroll and the chips presented to the cage

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Tip Rates – Actual Pool/Split – 4 of 4

• Employer maintains the following records:

• Amount of chips presented to cage for cashing

• List of tips splits

• Any other records of amounts the toke committee presents to the cage

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McQuatters Formula – 1 of 3

• Used for % of sales or $ per hour rates for food & beverage employees

• Requires that a portion of all sales are charge or debit card sales as opposed to cash sales

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McQuatters Formula – 2 of 3

• Accepted formula for determining food & beverage tip rates based on a court case

• Based on the premise that the charged tip rate at a venue is close to the cash tip rate at that venue

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McQuatters Formula – 3 of 3

• Percentage of Sales Rates

• Determined by point of sale systems that provide the amount of sales that each directly tipped employee made

• Allows for seasonal or other variables that impact the amount of business

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Other Methods - Determining Tip Rates

• Controlled test period using actual data to determine reasonable rate

• Formulas & methods available for determining rates for other categories

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Review

• Two types of tip agreements

• Benefits to Indian Tribal casinos

• Benefits to employees

• How to determine tip rates

• How to set up an “actual” tip rate

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Resources

• IRS.gov/tribes

• Tax Tools for Tribes

• ITG Tax Kit

• tege.ask.itg@irs.gov

• Contact your ITG Specialist

• (202) 283-9800