Large food or beverage establishments are required to file Form 8027 to report tip income and allocation of tips to employees. Not all food and beverage establishments are required to file Form 8027. For example, you do not need to file an 8027 if your business was only in operation for one month in 2012. However, if your establishment meets all of the following criteria then you must file Form 8027 between February and April during the tax season:
1 Food or beverages are served with the intention of consumption on the premises.
2 Tipping is a customary part of the service.
3 More than 10 employees who work 80 hours or more are normally employed on a typical business day.
The majority of food or beverage establishments meet the first and second criteria on the list, but its the third qualification that is the concerning issue for most owners. All employees count toward the 10 employee requirement even if they do not regularly receive tips as part of their job function such as cooks and kitchen help.
There is a worksheet to help determine if you had more than 10 employees working on a typical businesses because you can still qualify with less than 10 employees. Please note that If you own more than one food or beverage establishment you must fill out Form 8027-T instead to itemize the receipts of each individual establishment.
What information is reported and filed on Form 8027?
The top part of the form contains fields as to the basic information about the establishment including the name, address and employer identification number. The Employer’s name and address information as shown on Form 941 is also required. To the left, you see a choice of 4 types of establishments. Only check one box that best describes your business: evening meals only, evening and other meals, meals other than evening meals or alcoholic beverages.
As you move through the form, lines 1-2 deal with credit charges specifically, the tips on credit charges and the gross receipt totals with tips respectively. Line 3 should reflect the total amount of service charges added to a customer bill that was then allocated to employees as part of their wages.
The subsections of line 4 are really the crux of Form 8027 and reflect the total amount of reported tips by indirectly and directly tipped employees. Indirectly tipped employees receive tips from other employees instead of customers such as cooks and bussers. A directly tipped employee receives tips from the customers such as bartenders and waitstaff. Regardless of the source, any employee who earns $20 or more in tips on a monthly basis must report all tips to the employer. Add the amounts on lines 4a and 4b to calculate the total tips reported for the year.
On line 5, report the summation of the gross receipts for all food or beverage operations. Some things to consider when determining your gross receipts include cash sales, charge receipts and the retail value of complementary food or beverages if a tip was calculated based on the sale of that item.
Multiply the amount on line 5 by .08, unless you have been granted a lower rate by the IRS, and write this amount on line 6. Now compare the amount on line 6 with the amount on line 4c. If line 6 is less than lince 4c then your calculations for this form are complete. However if line 6 is more than line 4c, proceed to line 7 to allocate tips to employees.
Which calculation method is best to allocate tips to employees?
You have three options if you are required to allocate tips to employees: the hours-worked method, gross receipts method or good-faith agreement method. The hours-worked method simply distributes the tips to each employee based on the number of hours worked. Regardless of amounts earned, the employee who worked the most receives the largest allocation and so on down the line.
The gross receipts method is based on the amount of sales by each employee instead of the amount of hours worked. As a result, high performance employees with many sales receives the largest allocation regardless of hours worked.
The good-faith agreement method allows you to work out a custom arrangement based on circumstances of your particular establishment. The agreement is validated when two thirds of the staff agrees and signs the document. You must attach a copy of the agreement to Form 8027 if you select this option.
The result of your calculations are listed on each employee’s W-2 in box 8 to be reported as part of their individual wage. As a result, you should judge each allocation method on its fairness to your employees with regard to your particular situation.
