The payments
The IRS employment tax manual describes the arrangement in detail. Establishments such as adult entertainment clubs, restaurants and nightclubs pay drivers of taxicabs, limousines and tour buses who bring passengers to their door. Payment usually waits until the passenger pays a cover charge or otherwise becomes a customer. It is usually cash, sometimes a voucher redeemed later, and the amount "may or may not bear any relationship to the transportation fare" and "may be far greater than either the fare or the customary tip." Some establishments advertise "referral fees," "tips" or "incentives" in magazines aimed at drivers, and some drivers split the payment with hotel staff who steer guests to them (IRM 4.23.7.6.1, Dec. 18, 2012).
CCA 201106010 (Dec. 1, 2010); IRM 4.23.7.6.1 (Dec. 18, 2012).
Why they are not tips
The establishments' position, as Chief Counsel described it, was that the payments were tips the drivers should report to their own cab companies, which would make them wages on the cab company's books and nothing the establishment needed to report. Counsel disagreed. Under the facts it reviewed, the payments are "for the drivers' separate and distinct service of referring patrons, influencing patrons and delivering patrons to particular clubs, rather than merely transporting passengers" (CCA 201106010, Dec. 1, 2010). Two facts carried the conclusion:
- The payment depends on the passenger becoming a patron. "The club is not the recipient of the transportation service; they are the recipient of the delivery of a patron."
- The driver often chooses the destination, sometimes with hotel staff, to secure the payment, which shows the establishment is paying for customers.
Because the payments are not tips received in the course of the driver's employment, the drivers have no duty to report them to the cab company under IRC 6053(a), and the establishment cannot rely on the IRC 6041(e) exception for reported tips. The reporting duty falls on the establishment.
What to file
IRC 6041(a) requires a business that pays another person fixed or determinable income in the course of its trade or business to file an information return and furnish a statement once the year's payments reach the threshold. Today that is Form 1099-NEC, box 1, for payments for services by a nonemployee (the memo, written in 2010, referred to Form 1099-MISC). The threshold is per driver for the calendar year:
| Payments made in | Report a driver once the year's payments reach |
|---|---|
| 2025 | $600 |
| 2026 and later | $2,000, indexed for inflation after 2026 |
Cash and vouchers count the same as checks. Because these payments are not tips, they do not belong in the new cash-tips boxes added to the 2026 Form 1099-NEC; they are ordinary nonemployee compensation. If the establishment files no 1099, the manual tells examiners to consider the IRC 6721 and 6722 penalties, $340 per return for 2026 if never filed, plus the same again for the driver's copy.
W-9s and backup withholding
The manual pairs the reporting duty with backup withholding: if the establishment does not get a TIN from the driver, it must withhold 24% of the payment, and if it does not, "the payor becomes liable for the backup withholding under IRC 3406." For a cash business this means collecting a Form W-9 before the first payment and keeping a ledger by driver, so the year-end total and the TIN are both on file. A driver who will not give a TIN is paid net of 24%, deposited and reported on Form 945.
How examiners find them
The manual tells employment tax examiners working restaurants, nightclubs and similar businesses to "investigate the existence of payments of this type." The techniques it names are watching where transportation companies drop passengers off and asking about the business's deductions. A deduction for referral or promotion expenses with no 1099s behind it is the obvious lead, and the cash nature of the payments makes the records the establishment keeps the main evidence either way.
When the answer changes
Counsel was careful to limit its conclusion to the facts. Two variations change it:
- The cab company takes a share. If drivers must turn over part of the payment to the cab company to keep their jobs, the part the driver keeps "may be tips" for driving the cab, reportable through the employer.
- The establishment pays the company, not the driver. A payment to a cab or limo company that is a corporation is generally not reportable on a 1099.
Some drivers may be in a separate trade or business of supplying patrons; that does not change the establishment's reporting, which follows from paying an individual for a service.
What to do
- Get a W-9 at the first payment from every driver you pay, even small amounts, since you will not know who reaches the threshold.
- Pay by voucher or log every cash payment with the driver's name, date and amount.
- Verify the name and TIN before year end, so the 1099s you file do not come back on a CP2100.
- File Form 1099-NEC by January 31 for each driver over the threshold (February 1 in 2027, because January 31 is a Sunday).
- Withhold 24% from any driver who will not provide a TIN, and deposit it.
If prior years were never reported, the reasonable-cause regulation lists "the filer was never required to file this return or statement with respect to this type of transaction previously" as a significant mitigating factor (Treas. Reg. 301.6724-1(b)), which Counsel cited in the memo. It helps only if the failure is fixed promptly once discovered. See the reasonable-cause regulation.
Questions people ask
We call them tips. Does that make them tips?
No. Chief Counsel looked at what the payment is for, not the label. A payment for delivering a customer, conditional on the customer coming in, is for a separate service.
The drivers are employees of the cab company. Is it not the cab company's problem?
Not under the facts Counsel reviewed. The service is performed for the establishment, outside the drivers' employment, so the establishment reports it.
Which form, and which box?
Form 1099-NEC, box 1, for each driver whose payments for the year reach the threshold: $600 for 2025 payments, $2,000 for 2026 payments.
Is the Chief Counsel memo binding?
No. Chief Counsel Advice "may not be used or cited as precedent," but the IRS manual adopts its conclusion and instructs examiners to apply it.