If it weren’t for cash tips, many restaurant and bar employees would have trouble making ends meet. As for any other type of income, the Internal Revenue Service wants its cut. This means that all employees who receive $20 or more a month in tips must report all of the tip money to their employers. Employers report these tips through IRS Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.
Requirement to File
You will file Form 8027 if you own a large food or beverage establishment. If you own more than one establishment, you’ll have to file a separate form for each one, even if they operate in the same building. If you have to file multiple 8027s, then you’ll also have to file a copy of Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips.
How do you know whether your food or beverage establishment falls under the filing requirements? Here are the applicable rules:
- Your business serves food and/or beverages that are consumed at the establishment
- Customers normally tip for service
- On a typical business day, you employ more than 10 employees who work more than 80 hours
If that last requirement has you scratching your head, all you have to do is figure the average number of employee hours worked on a typical business day in your busiest and least busy months of the year. Divide the average by the number of days opened during those two months, and if the result is greater than 80 hours, then the rule applies to you. If your establishment is new, use two consecutive months to figure the average hours.
When you calculate the number of employees, include those that don’t receive tips, such as cooks and cashiers. By the way, you can use online software to help you figure your employees, prepare your Form 8027 and file it electronically. The software can import external Excel or CSV data, and the provider will even prepare the form for you.
You must file your Form 8027 by the end of February, but if you file electronically, you have until the end of March. If you need an extension of time, file Form 8809.
You must allocate tips to employees that receive tips if your reported tips are less than a certain percentage (usually 8 percent) of your gross receipts for the month. You must also supply a Form W-2, Wage and Tax Statement, to each employee who receives allocated tips. The form must include the amount of tip money allocated to the employee.
Failure to file Forms 8027 and W-2 in a timely manner can result in IRS penalties.