To the casual casino patron, a typical betting transaction at a casino property merely involves placing a wager and either collecting a winning bet or watching the house win. A winning bettor, in his jubilation, may even tip the dealer with cash or casino chips. The patron may also tip the waitress who serves him a drink while he’s playing. The typical betting transaction for casino operators, however, implicates several potential federal tax obligations. As a general proposition, federal tax laws are premised on the theory that any accession to wealth is potentially subject to reporting and taxation. In some instances, federal tax laws require the person making the payment to file an information return and even withhold tax that may become due. The Internal Revenue Code of 1986 (IRC), as amended, is replete with a complex series of exceptions, exemptions and special rules depending on the amount and source of the payment.
The 2009 federal tax reporting deadlines for most business entities are fast approaching. The time is ripe to revisit the reporting and withholding obligations for casino operators. This article focuses on three tax responsibilities of casino operators: 1) tip withholding and reporting obligations; 2) reporting and withholding tax from winning payments; and 3) the new rules for reporting and withholding winnings from poker tournaments.
Tip Income Reporting and Withholding
Casino patrons, hoping for good luck or simply out of the joy of winning, often tip dealers either in cash or casino chips. Food and beverage servers at casinos also frequently receive tips from casino patrons. For casino employees, these tips are extra money in their pockets. But from a federal tax law perspective, these tips constitute income and are therefore subject to income tax. The tip may also be considered “wages” that an employer must report, withhold income taxes on, and even include in the FICA, FUTA and Medicare tax bases.
The payment of tips has been a frequent source of IRS frustration and scrutiny. There is a strong incentive for dealers not to report tip income, and the IRS has limited ability to track the payments. For the casino, a dealer’s failure to report tip income presents a substantial problem because IRC § 3402 requires casinos to withhold income tax from tips and report the tip income. Failure to withhold and report can result in the imposition of penalties on a casino.
The IRS has introduced several voluntary compliance programs directed at specific industries where tipping frequently occurs. In particular, the IRS has introduced separate voluntary compliance programs for the casino and food and beverage industries. For casinos, the voluntary compliance program offers several incentives. These incentives include deeming participating casinos to be in compliance with 1) the reporting obligations of IRC § 6053; 2) the requirement to file IRS Form 8027; and 3) for the years during which an agreement is in effect, limiting the IRS’s ability to assert employer liability for payment of taxes attributable to the tip income of participating employees. Under IRC § 6053, employees and employers are required to furnish written reports detailing the amount of tips received. An employee’s failure to report tips pursuant to IRC § 6053 can result in the imposition of penalties equal to 50 percent of the amount that should have been reported.
The IRS recently introduced a new program for the gaming industry, the Gaming Industry Tip Compliance Agreement (GITCA) Program. A GITCA serves to establish minimum tip rates for employees receiving tips within certain proscribed occupational categories. Essentially, a casino will report tip income and withhold and pay taxes for participating employees based on the tip rate established in the GITCA. The IRS provided a model form of GITCA in Revenue Procedure 2007-32. In addition to establishing tip rates, a GITCA imposes certain recordkeeping requirements on casinos.
Under a GITCA, casinos will be required to maintain certain categories of records and make those records available to the IRS upon request. The records include: 1) employee-related records (e.g., employee name, Social Security Number, occupational category and wages); 2) gaming establishment records (e.g., amount of tokes and chips employees present to the employer for redemption and lists of tips split by a toke committee); 3) food and beverage operations records; and 4) tip rate records. The records must be maintained for at least a four-year period.
Generally, once the GITCA is entered into, an employer is limited in its ability to modify the terms of the agreement. This limitation can be problematic because employers are required to pay and withhold tax based on the tip rates established in the GITCA. Revenue Procedure 2007-32 does, however, offer a basis to seek a modification of the tip rates in the event that an employer has a decrease of 20 percent or more in gross monthly revenue compared to the same month during the prior year. The relief offered under Revenue Procedure 2007-32 may be especially helpful to casinos hit by the current economic downturn as an avenue to lower existing tax obligations.
Reporting and Withholding Tax for Gaming Payouts
Federal tax laws require any person making the payment of “winnings” to deduct and withhold 25 percent of the proceeds. Winnings are defined under IRC § 3402(q) to encompass three categories of proceeds that exceed $5,000: 1) proceeds from a wagering transaction if the amount of the proceeds are at least 300 times as large as the amount wagered; 2) proceeds from a state-conducted lottery; and 3) proceeds from a wager placed in a sweepstakes, wagering pool, lottery or certain pari-mutuel pools. “Proceeds” are calculated by reducing the payout by the amount received and including the fair market value of any property other than money that is won. Thus, if a bettor places a $5 wager and wins $5,000, the proceeds would only be $4,995.
The patron receiving winnings is obligated to provide certain information to the casino. Specifically, the patron must furnish a written statement, made under penalties of perjury, to the casino containing the patron’s name and address, and the Taxpayer Identification Number(s) of the person receiving the payment and any person entitled to share in the winnings. The written statement is ordinarily furnished by use of IRS Form W-2G or IRS Form 5754.
There is a significant exemption from the withholding requirements for winnings from slot machines, bingo and keno. The federal tax law in certain instances, however, requires a person making a payment to “backup withholding.” Essentially, backup withholding is implicated in situations where the recipient refuses to furnish a Taxpayer Identification Number to the person making the payment. Thus, if a patron who wins more than $5,000 from a slot machine refuses to provide the casino with his Social Security Number (or Taxpayer Identification Number), then the casino would be required to backup withhold.
In addition to these potential withholding obligations, casinos are also required to file information returns to report certain payments of wagering winnings. Wagering winnings from bingo games and slot machines that exceed $1,200 must be reported by the casino to the IRS. The amount of the winnings from bingo games and slot machines is not reduced by the amount wagered. Wagering winnings from a keno game in excess of $1,500 also must be reported to the IRS. The amount wagered in one keno game may be subtracted from the amount of winnings from that keno game. Winnings also include the fair market value of any property other than money that the patron wins. The federal tax law requires certain information to be included in the information return, including identifying the recipient and the casino making the payment. The information return is made in the form of IRS Form W-2G.
Poker tournament winnings from gambling have long been recognized as taxable income to gamblers. Federal tax law imposes a host of withholding and reporting obligations on any person who pays income to another person. During late 2007, the IRS released Revenue Procedure 2007-57, which provides guidance on the reporting of and withholding obligations related to the payment of winnings from a poker tournament. Prior to the release of Revenue Procedure 2007-57, there was widespread confusion among casinos and poker tournament sponsors whether payments to poker tournament participants were subject to the IRC income tax withholding and information reporting requirements. Revenue Procedure 2007-57 resolved the confusion. The source of the confusion centered on whether entry fees and buy-ins amounted to a “wagering pool.” As discussed above, IRC § 3402(q)(1) requires every person making a payment of “winnings” to deduct and withhold income tax from the payment. Winnings are defined to include proceeds of more than $5,000 paid from a wagering pool.
In Revenue Procedure 2007-57, the IRS concluded that entry fees and buy-ins constitute a wagering pool. Accordingly, payments in excess of $5,000 paid to a poker tournament participant are subject to the income tax withholding and information reporting requirements of the IRC.
Pursuant to Revenue Procedure 2007-57, sponsors of poker tournaments must report payments of winnings in excess of $5,000. There are two potential obligations that the IRC may impose upon a person who makes “any payment of winnings”: income tax withholding and information reporting. A person who receives gambling winnings must provide certain information to the casino or other person making the payout. The party paying the winning payout must then report to the IRS the amount of the payout and the identity of the winner.
Revenue Procedure 2007-57 carves out a significant safe harbor that relieves casinos and other sponsors from the withholding obligations. Casinos and other poker tournament sponsors are not required to withhold income tax if the IRC information reporting requirements are satisfied. To qualify for the safe harbor of Revenue Procedure 2007-57, casinos and other poker tournament sponsors must:• Collect the name, address and Taxpayer Identification Number of tournament winners who receive payments in excess of $5,000;
• The information must be provided under penalties of perjury on IRS Form W-2G or IRS Form 5754; and
• The casino or other tournament sponsor must file a copy of the information return with the IRS on or before Feb. 28 (or March 31 if filed electronically) of the calendar year following the year of payment.
The information reporting requirements went into effect for payments made on or after March 4, 2008.
As federal tax season fast approaches, casinos will again face the deadline to file returns reporting tips and certain winning payouts. To the casual casino patron, a visit to the casino represents a few hours of entertainment. However, to the casino operator, to casino employees and even to a few lucky patrons, the casino visit can invoke a complex series of tax reporting and withholding obligations.
Peter J. Kulick is a tax and gaming attorney with Dickinson Wright PLLC, which has an international gaming law practice with offices in Michigan, Washington, D.C., Toronto and an affiliated office in Macau. Peter received his LL.M in tax law from New York University. Peter may be reached via e-mail at email@example.com.