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Las Vegas Tip Agreements And The Risk Of Opting Out

Las Vegas is a first-class, tourist destination and has some of the top nightclubs in the world. Many Vegas residents are nightclub, casino, or restaurant employees, and earn tip income in addition to their regular wages. Because tips are considered wages and are subject to employment taxes, including Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), and Federal income tax withholding, the challenge for employees is making sure they correctly report tips on their annual tax returns.

IRS Tax audit

The IRS created the National Tip Reporting Compliance Program (NTRCP) to “help” employees accurately report their tip income. To that end, the IRS NTRCP enters into tip agreements with employers: in Las Vegas, these agreements typically go by the acronyms of GITCA (Gaming Industry Tip Compliance Agreement) and TRDA (Tip Rate Determination Agreement).

McQuatters Formula

Both GITCAs and TRDAs require at least a 75% employee participation rate. Under these agreements, a tip “rate” is established for participating employees based on their occupation. The IRS calculates the tip rate based on a complicated formula called the “McQuatters Formula” (McQuatters v. Commissioner, T.C. Memo. 1973-240) using the employer’s historical sales records. For example, the IRS may assign a tip rate of $45 an hour to a bartender or $100 an hour to a cocktail waitress. The tip rate typically changes each year. But as long as the employee opts in to the agreement, his or her tips are automatically calculated and reported based on hours worked. The employer also has an obligation to institute tip reporting educational programs for all employees. As long as the employer and the employee are complying with the requirements of the agreement, the IRS will not audit either one.

Annual Tip Income Audit

Here’s the catch. As many Las Vegas employees now know, every year employers must provide the IRS with an annual report itemizing all employees who did not participate in the tip agreement. And the IRS has the authority to audit these employees’ tip incomes, no matter how long the employee opted in to the agreement. If the employee opted out for one day during the year, the IRS can initiate an audit. Typically, the examination is an IRS correspondence audit requesting that the employee provide a tip log or daily record of his or her tips. If an employee fails to respond or the IRS rejects the employee’s response, the IRS will automatically calculate the individual’s yearly tip income by multiplying a nonparticipant tip rate (much higher than the participant rate) by the number of hours the employee worked during the year. In addition, the IRS may assess additional FICA tax and penalties, including a failure to correctly report tip income penalty, in addition to proposing an income tax deficiency in Las Vegas.

Many Las Vegas residents rely on tip income to supplement their wages. It is important for these employees to understand tip participation agreements and the risk of opting out. The IRS actively pursues audits of employees who do not participate in their employers’ tip rate agreements.

Silver Law PLC operates in Arizona and Nevada and all of its lawyer are former lawyers for the IRS. A tax lawyer from our team can help you understand how the complex tax code applies when you are an employee earning tips. We’ll help you ensure that you are meeting your obligations. If you have been audited or are facing collections, we can also help you navigate that process. We can either find ways to bring down your tax debt or can negotiate a settlement for you. Call us today to talk with a tax lawyer and learn more.

Silver Law PLC

410 South Rampart Blvd, Suite 390
Las Vegas, Nevada 89145
Office: 702-726-6819
Website: taxcontroversy.com

Silver Law PLC

7033 E. Greenway Pkwy, Ste 200
Scottsdale, AZ 85254
Office:(480) 429-3360
Website: taxcontroversy.com

Silver Law PLC

410 South Rampart Blvd, Suite 390
Las Vegas, Nevada 89145
Office: 702-726-6819
Website: taxcontroversy.com

Silver Law PLC

7033 E. Greenway Pkwy, Ste 200
Scottsdale, AZ 85254
Office:(480) 429-3360
Website: taxcontroversy.com

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