Form 8027: Your Guide to Reporting Tip Income

If you own a bar, restaurant, or other food or beverage business, tips are likely a part of doing business. Bar and restaurant owners usually pay tipped employees a base hourly wage and tips make up the remainder of their compensation.

Reporting employees’ wages and withholding on their W-2s is complicated enough, but figuring out how to report tip income can be especially confusing if you’re new to the industry.

This guide covers IRS Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, the form the Internal Revenue Service (IRS) uses to track the tips brought in by food and beverage establishments and allocate tips between employees.

When Is IRS Form 8027 Required?

All food and beverage businesses aren’t required to file Form 8027. According to IRS rules, you only have to use this form if your business meets all of the following tests:

• Your business is located in the 50 U.S. states or the District of Columbia.
• Your business is located where tipping of food and beverage employees is considered customary. If you own a fast food business, generous customers might occasionally tip an employee, but you don’t have to worry about tracking those tips. IRS rules specifically exclude fast food operations.
• Your business normally employs more than 10 employees on a typical business day. This is known as the “10-employee test,” and the IRS Instructions for Form 8027 include a worksheet to help you determine whether you meet the requirements.

Here’s how you calculate that test:

1. Enter 1/2 of the total employee hours worked during the month with the highest gross receipts from food and beverages in the tax year.
2. Enter the number of days you were open for business during the month used for step 1.
3. Enter 1/2 of the total employee hours worked during the month with the lowest gross receipts from food and beverages in the tax year.
4. Enter the number of days you were open for business during the month used for step 3.
5. Divide line 1 by line 2.
6. Divide line 3 by line 4.
7. Add lines 5 and 6. If line 7 is greater than 80, you must file Form 8027 for the tax year.

While completing the worksheet, keep the following rules in mind:

• You have to include all employees of the business—not just those involved in food and beverage activities or those that receive tips.
• Businesses structured as corporations shouldn’t count anyone owning 50% or more of the corporation’s stock as an employee for the calculation.
• You need to treat each food or business operation as a separate establishment. You may have more than 1 food and beverage establishment if you have more than 1 location, even if the same entity owns them. You may also have more than 1 establishment if you have several operations within the same location. For example, if you have a deli counter and full-service restaurant in the same location, these are treated as separate establishments if you record receipts from each activity separately.

What Information Do I Need to File Form 8027?

If you meet the requirements for filing Form 8027, the form isn’t that difficult to fill out. However, you do need to have the right information available. Gathering that information requires having employees properly report their tip income each month. Without this information, it will be impossible to fill out Form 8027 accurately.

There are 3 ways to have employees report tip income.

1. You can require employees to enter their cash tips into your point-of-sale (POS) system before clocking out at the end of each shift. Employees don’t need to enter tips from debit or credit card transactions, as your POS system should already capture these.
2. You can use IRS Form 4070A or Form 4070 (both of which are included in IRS Publication 1244) to have employees report their tips. Form 4070A is a daily report of tips, while Form 4070 is for monthly reporting.
3. You can require employees to report tips using your own form, as long as it includes:
   • The employee’s name, address, and Social Security number
   • The employer’s name
   • The period covered and date reported
   • Total amount of tips received by the employee
   • The employee’s signature

Employees only need to report tips if they received tips of $20 or more during the month.

To complete Form 8027, you also need:

• Total charged tips for the calendar year.
• Total sales of food and beverage from receipts that include a charged tip.
• Total service charges, also known as automatic gratuities, of less than 10% paid to employees as wages.
• Total tips reported by indirectly tipped and indirectly tipped employees. For example, bartenders and wait staff usually receive direct tips and might share a portion of their tips with other employees, such as bussers and cooks.
• Total receipts from food and beverages.
• Total number of directly tipped employees at the business during the tax year.

How Do I Fill Out Form 8027?

Once you’ve determined that you need to file Form 8027 and have gathered the information needed to complete your form, filling it out should be relatively straightforward. Here’s an overview of the process. You can find step-by-step instructions in the IRS Instructions for Form 8027.

Introduction

At the top of Form 8027, you enter information about your business, including:

• The business name, address, and employer identification number.
• Your establishment number. This is a 5-digit number you assign if you own more than 1 establishment. For example, if you own a coffee shop with 2 locations, the 1st location might be 00001, and your 2nd location might be 00002.
• The type of establishment (evening meals only, evening and other meals, meals other than evening meals, or alcoholic beverages only).

Financial Reporting

This section requires the financial data mentioned above.

On lines 1 through 4, provide information on tips. On lines 5 through 6, enter information on gross receipts from sales of food and beverages.

Lines 7 and 8 are where Form 8027 can get tricky. If your total reported tips are less than 8% of total food and beverage sales, you’re required to allocate additional tip income to the W-2 of every employee who reported less than 8% of their respective sales.

Essentially, this rule indicates that the IRS believes these employees aren’t reporting all of their tips, and it’s up to you as the employer to allocate tips so that their reported income reflects the minimum 8% allocation.

The most common ways to do this are:

1. Hours worked method. If you have a restaurant with fewer than 25 full-time employees, you can allocate the tip shortfall by spreading it among underreporting servers based on their percentage of total hours worked compared to the other servers.
2. Gross receipts method. Any business can use this method. You determine the amount each server should have reported in tips to reach the 8% minimum by calculating the server’s gross receipts as a percentage of total restaurant gross receipts. If the server’s gross receipts are less than your calculated percentage, then you must report a prorated portion of the total shortfall on that employee’s W-2.

There’s a 3rd way to handle allocated tips, known as the “good-faith agreement” method. However, this method requires a written agreement between the establishment owner and at least 2/3 of tipped employees. This method is complicated and rarely used. You can find more information about this method in the Instructions for Form 8027.

Allocated tips should go in box 8 of each employee’s W-2.

If getting employees to report tip income properly is an ongoing struggle, the IRS offers a Tip Rate Determination & Education Program. The program can help you implement better processes for tip reporting and educate employees on their tip reporting responsibilities. You can learn more about this program in IRS Publication 3144 or email [email protected] to request more information.

Signature and Date

Finally, sign and date the form, and it’s ready to file.

If you file more than 1 Form 8027 because you have more than 1 establishment, you may also need to complete Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income, and Allocated Tips. This is just a transmittal form used when mailing more than 1 informational tip reporting form. You don’t need Form 8027-T if you electronically file or mail only 1 Form 8027.

When and Where Do I File Form 8027?

Form 8027 is due by February 28 if you file by mail or March 31 if you file electronically. If either of those dates falls on a weekend or holiday, the deadline shifts to the next business day.

You can mail the form to:

Department of the Treasury
Internal Revenue Service
Ogden, UT 84201

Alternatively, you can file electronically using the Filing Information Returns Electronically (FIRE) system.

If you need more time to complete the forms, you can request a 30-day extension by filing Form 8809.

How Do I Avoid Form 8027 Penalties?

If you’re required to file Form 8027 but don’t or knowingly file an inaccurate return, the IRS can levy hefty fines and penalties.

Those penalties include a late fee ranging from $50 to $290 per form, depending on how late you file. In addition, if you don’t correctly fill out Form 8027, you can’t accurately fill out employees’ W-2 forms. The same penalty amounts apply to each W-2 issued incorrectly.

If the IRS determines you’ve intentionally misreported tip income, it can levy fines up to $10,000 and even bring criminal charges against you. For that reason, it’s important for you to have a process in place to collect tip information from employees and accurately report those tips to the IRS.

Need a Hand With IRS Form 8027?

Working with an accountant or other tax professional will make completing and filing Form 8027 that much easier. While it’s not the most complex tax form you’ll encounter, if you’re already using accounting software like FreshBooks to make working with your accountant easier, getting your accountant’s help with this tax form should be no biggie.