In some industries, employees earn the bulk of their wages from tip income rather than hourly or salary pay. If you own a food or beverage establishment, your employees likely earn tips. Like regular pay, you still need to withhold taxes on tip income. And, you need to report tip earnings on Form 8027.
What is Form 8027?
Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, is a document you use to record the total amount of tips your food or beverage business brought in during the year.
Employees must report their tip income if they earn more than $20 per month in tips. To do this, they must use the employee tip reporting form, Form 4070. Collect Form 4070 by the 10th of each month so you know how much your employees received in tips the previous month.
Keep accurate records, including Forms 4070 and receipts, so you can fill out how much your business brings in via tips on your business’s tip reporting form.
The government uses the information you report on Form 8027 to verify that you withheld the correct amount of taxes from your employees’ tip income throughout the year.
Who needs to file IRS Form 8027?
According to the IRS, you are required to file Form 8027 if you own a food or beverage establishment:
- That is located in the 50 states or D.C.
- Where tipping is customary
- That meets the 10-employee test
The 10-employee test determines whether you employed more than 10 employees on a typical business day throughout the year. The 10-employee test is the average number of employee hours worked during a typical business day, according to the IRS. If you have more than one food or beverage business, you only need to do one 10-employee test.
A food or beverage establishment provides food or beverages for consumption on the premises. Fast food businesses are excluded. If customers order, pay at the counter, and pick up their own food, it is considered fast food.
Form 8027 instructions
When filling out Form 8027, you need to provide information about your business, like your EIN, whether you accept credit card payments, and what products you serve (e.g., evening meals).
In the main section of the form, you must report the total tips your business brought in. There are separate boxes for directly and indirectly tipped employees.
Directly tipped employees are those who receive money directly from a customer, like waiters and bartenders. Indirectly tipped employees receive their tips from other employees, not customers. Examples of indirectly tipped employees include cooks and bussers.
What is tip allocation?
Allocated tips are amounts you give in addition to the tips employees reported. To determine whether you owe allocated tips, Form 8027 will ask you to multiply your gross receipts by 8%. If your gross receipts multiplied by 8% are more than the total tips reported by your indirectly and directly tipped employees, you must allocate tips to directly tipped employees.
You can calculate allocated tips using one of three methods: hours-worked method, gross receipts method, or good-faith agreement. Record which method of tip allocation you use on Form 8027, if applicable.
You can request a lower rate than 8%, but you cannot go below 2%. If the IRS approves your request, use the lower percentage to determine tip allocation.
If you must allocate tips, you need to enter the amount allocated to each employee in box 8, Allocated Tips, on Form W-2. Do not add the allocated tip amounts to the employee’s regular wages. And, do not withhold taxes on allocated tips—employees are responsible for doing this on their own.
How can I file Form 8027?
The IRS prefers that you file Form 8027 electronically through the IRS’s Filing Information Returns Electronically (FIRE) system. You are required to file it electronically if you have 250 or more Forms 8027.
There is also an option to file Form 8027 by mailing it to the IRS. To learn more about this option, visit the IRS’s website.
When is the Form 8027 due date?
If you are mailing Form 8027 to the IRS, it is due by February 28. If you file Form 8027 electronically, the due date is March 31. If the date falls on a weekend or holiday, Form 8027 is due the next business day.
You can file Form 8809, Application for Extension of Time to File Information Returns, if you need an extension. If accepted, you will have an additional 30 days from the Form 8027 due date. Due dates for Form 8809 are February 28 (paper) or March 31 (electronic).
If you don’t file Form 8027 on time, you will receive a penalty.
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This article has been updated from its original publish date of Mayy 10, 2012.
This is not intended as legal advice; for more information, please click here.
