For restaurant owners and employees, tip reporting is essential for both tax compliance and avoiding penalties. Two key IRS forms come into play: Form 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips) and Form 4070 (Employee’s Report of Tips to Employer). While both deal with tip income, they serve different purposes.
Form 8027: For Employers
Who Files It?
Employers in the food and beverage industry who operate large establishments where tipping is common.
Purpose
- Reports total receipts, charged tips, and allocated tips for employees.
- Helps the IRS ensure that employees report enough tip income.
- Determines whether an employer must allocate additional tips to employees.
Who Must File?
A restaurant must file Form 8027 if:
- It has more than 10 employees working on typical business days.
- It serves food or beverages for on-site consumption.
- Tipping is customary at the establishment.
Key Reporting Sections
- Gross receipts from food and beverage sales.
- Charge tips (from credit/debit cards).
- Total reported tips by employees.
- Allocated tips (if reported tips are too low, the employer must assign additional taxable tips to employees).
Deadline
- Due by February 28 (paper filing) or March 31 (electronic filing) for the previous tax year.
Form 4070: For Employees
Who Files It?
Employees who receive $20 or more in tips in a month.
Purpose
- Employees use Form 4070 to report their tip income to their employer.
- Employers use this information to withhold the correct taxes (Social Security, Medicare, and income tax).
When to File?
- Employees must submit Form 4070 to their employer by the 10th of each month, reporting tips received in the previous month.
What Tips Must Be Reported?
- Cash tips from customers.
- Credit/debit card tips.
- Tips received from other employees (tip pooling or tip-outs).
Why It Matters
- Failure to report tips properly can result in IRS audits, fines, and penalties for both employees and employers.
- Employers use Form 4070 data to complete Form 8027, which the IRS reviews for accuracy.
Key Differences at a Glance
| Feature | Form 8027 (Employers) | Form 4070 (Employees) |
|---|---|---|
| Who Files? | Restaurant owners/employers | Tipped employees |
| Purpose | Reports total receipts, tips, and allocated tips | Reports an employee’s total tip income |
| Due Date | Feb 28 (paper) / Mar 31 (electronic) | By the 10th of each month |
| What It Reports? | Total business receipts, charge tips, employee-reported tips, and allocated tips | Cash, credit, and pooled tips received by the employee |
| IRS Penalties for Noncompliance? | Yes, for failure to report tips or allocate properly | Yes, for underreporting tip income |
Bottom Line for Restaurant Owners and Employees
- Employees: Report all tips over $20 each month using Form 4070 to stay compliant and avoid IRS issues.
- Employers: Ensure all employees report tips accurately and file Form 8027 if your business meets the filing criteria.
