A Guide to

Tip Income Reporting

for Employers in the

Food and Beverage Industry


If you are an employer in 

the food and beverage industry, 

this guide is for you. 

The Internal Revenue Service (IRS) began its 

Tip Rate Determination/Education Program (TRD/EP) 

in October 1993 for the food and beverage industry. 

The objective of the Program has been to improve and 

ensure compliance by employers and employees with 

statutory provisions relating to tip income.
The Program of 

Tip Reporting

What tip reporting options are 

available?

■ Tip Rate Determination Agreement 

(TRDA)

■ Tip Reporting Alternative Commitment (TRAC)

■ Institute your own reporting system to 

comply with the tax law

Under the Tip Rate Determination/Education Program (TRD/EP), you may 

enter into either the TRDA or TRAC 

arrangement. The IRS will help you understand and meet the requirements for 

participation. The next pages show you 

how these two arrangements differ. 

What’s in it for me? 

■ A business tax credit for social security and Medicare taxes that you pay on 

certain employee tips

■ Compliance with the law

How does the program benefit my 

employees?

■ Greater social security and Medicare 

benefits

■ Increased income may improve their 

financing approval when applying for 

mortgage, car, and other loans

■ Increased unemployment benefits

■ Increased retirement plan contributions (if applicable)

■ Increased worker’s compensation


TRDA vs. TRAC 

(how they differ)

TRDA requires the IRS to work with the 

establishment to arrive at a tip rate for 

the various restaurant occupations.

TRAC

TRAC does not require that a tip rate 

be established but it does require the 

employer to:

■ establish a procedure where a directly 

tipped employee is provided (no less 

than monthly) a written statement of 

charged tips attributed to the employee.

■ implement a procedure for the employees to verify or correct any statement of attributed tips.

■ adopt a method where an indirectlytipped employee reports his or her tips 

(no less than monthly). This could 

include a statement prepared by the 

employer and verified or corrected by 

the employee.

■ establish a procedure where a written 

statement is prepared and processed 

(no less than monthly) reflecting all 

cash tips attributable to sales of the 

directly-tipped employee.

TRDA

TRAC does not require an agreement 

between the employee and the employer.

TRDA requires the employee to enter 

into a Tipped Employee Participation 

Agreement (TEPA) with the employer.


TRDA TRAC

TRDA has no specific education 

requirement.

TRAC includes a commitment by the 

employer to educate and reeducate 

quarterly all directly and indirectlytipped employees and new hires of their 

statutory requirement to report 

all tips to their employer.

TRDA requires the employer to get 75% TRAC affects all (100%) employees.

of the employees to sign TEPAs and 

report at or above the determined rate.

TRDA provides that if employees fail to 

report at or above the determined rate, 

the employer will provide the names of 

those employees, their social security 

numbers, job classification, sales, hours 

worked, and amount of tips reported.

TRAC provides that if the employees of 

an establishment collectively underreport their tip income, tip examinations 

may occur but only for those employees 

that underreport.

TRDA participation assures the em- TRAC includes the same rule.

ployer that prior periods will not be 

examined as long as participants comply with the requirements under the 

agreement. 


Example of 

a TRAC Statement

Use the following guide to help you develop your statement to give to your employee. A TRAC statement is given to an employee showing tips attributed to him/her. 

This example not only fulfills the statement required for charged tips, but also for 

cash tip reporting and for indirectly-tipped employee reporting.

Employer Portion

Employee Name: Mark Doe 

Employee Address: 123 Main Street 

City, State, Zip: Any Town, USA 12345

Employee SSN: 000-00-0000 

Job Category: Food Server 

Restaurant Name: ABC Bar & Grill 

Employer EIN: 00-0000000 

Report Period: 01/01/00-01/31/00

Gross Sales $ 6,000.

Charged Sales w/Tips $ 2,000.

Charged Tips $ 280.

Charged Tip Rate 14% 

Sales Subject to Cash Tips $ 4,000. 

Employee Portion

Cash Tips $ 520.

Cash Tip Rate 13% 

Tips Shared w/Others

Name: Job Category: Amount:

Johnny Noname Busser $ 120. 

Total (120.)

Tips Received from Others

Name: Job Category: Amount:

Susie Cue Cocktail $ 100. 

Total 100. 

Net tips kept and reportable: $ 780.

Employee Signature: Date:

Employer fills out top 

portion.

Gross Sales: only include 

food & drink amount. 

Do not include tax, tip, 

or nonfood/drink items.

Charged Sales: include 

charged sales that show 

a tip on food & drink 

amounts only. Do not

include tax, tip, or nonfood/

drink items. (A charged sale 

with no tip is included as a 

cash sale.)

“title”

Employee fills out bottom portion.

An indirectly-tipped employee would only receive 

(from the employer) the 

“title” portion of statement 

filled out, unless employer 

captured “tips shared w/ 

others” information from 

the directly-tipped employee’s TRAC Statement and 

showed it as “tips received 

from others.”

Employee signs statement 

and gives a copy to employer, retaining a copy 

for his/her records. This 

statement would satisfy 

employer’s requirement under the TRAC arrangement 

and the employee’s requirement under the law.
For More Information

The following is a list of IRS publictions and forms relating to tip income 

reporting that can be downloaded from 

the IRS Web site at www.irs.ustreas.gov 

and can be ordered through the IRS by 

dialing 1-800-829-3676. 

Pub 505 – Tax Withholding and Estimated Tax

Pub 531 – Reporting Tip Income

Pub 1244 – Employee’s Daily Record of Tips 

and Report to Employer. This publication 

includes Form 4070, Employee’s Report of 

Tips to Employer, and Form 4070A, Employee’s Daily Record of Tips.

Form 941 – Employer’s Quarterly Federal Tax 

Return

Form 1040ES – Estimated Tax for Individuals

Form 4137 – Social Security and Medicare 

Tax on Unreported Tip Income

Form 8027 – Employer’s Annual Information 

Return of Tip Income and Allocated Tips

Form 8846 – Credit for Employer Social 

Security and Medicare Taxes Paid on Certain 

Employee Tips

Form W-2– Wage and Tax Statement; and 

separate Instructions for Forms W-2 and W-3

How To Apply

To enter into one of the arrangements, 

you may call 1-800-829-4933 for the 

IRS Stakeholder Liaison Field office in 

your area. A Stakeholder Liaison can 

assist you with more information about 

the Tip Program. You may also obtain 

information by sending an e-mail to 

Tip.Program@irs.gov. 

Who Should Apply

All employers with establishments 

where tipping is customary should 

review their operations. Then, if it 

is determined that there is or has 

been an underreporting of tips, the 

employer may apply for one of two arrangements under the TRD/EP – TRAC 

or TRDA.

Note: Employers currently under a 

TRDA, and wishing to switch to a 

TRAC, must first terminate their TRDA.

When to Apply

An employer may apply for either one 

of the two arrangements at any time. 

The effective date of the arrangement is 

determined by receipt and handling of 

the employer’s application.

TRDA is effective as of the date the 

Employment Tax Territory Manager 

signs the arrangement.

TRAC is generally effective as of the 

first day of the quarter following the 

date the Stakeholder Liaison Area 

Manager signs the agreement.

How To Get 

Your Program Underway
Publication 1875 (Rev. 8-2006)

Catalog Number 22212G

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