ABC Taxes, Tips & Tools

An inde­pen­dent con­trac­tor sug­gested that although the IRS receives about 50,000 Form 8027’s in a given year it should be receiv­ing around 3 times that amount.  As a result, the IRS will focus exams on firms that failed to file form 8027.

What is Form 8027? It’s the Employer’s Annual Infor­ma­tion Return of Tip Income and Allo­cated Tips.  It’s required of employ­ers who oper­ate large food or bev­er­age estab­lish­ments.  If more than one estab­lish­ment oper­ates under 1 roof each estab­lish­ment must pro­vide a Form 8027 if receipts are recorded sep­a­rately, and file form 8027-T, Trans­mit­tal of Employer’s Annual Infor­ma­tion Return of Tip Income and Allo­cated Tips as well along with the form 8027.

What is a large food or bev­er­age establishment?

• It serves food or bev­er­ages to be con­sumed on the premises.
• Tip­ping is customary
• More than 10 employ­ees, who worked more than 80 hours, were typ­i­cally employed on the premises in a typ­i­cal busi­ness day.  The num­ber of employ­ees includes those who are not nec­es­sar­ily tipped, such as bussers, cooks, kitchen staff, wine stew­ards, seat per­sons etc.  but it does not include a per­son who owns 50% or more of the stock in a cor­po­ra­tion while work­ing in the business.

The Instruc­tions for Form 8027 includes a work­sheet to deter­mine if Form 8027 is required.  You will take ½ the aver­age of the num­ber of hours worked/per day in the month with the great­est gross receipts and add it to ½ the aver­age of the num­ber of hours worked/per day in the month with the low­est gross receipts.  If this num­ber s more than 80 hours then your firm is required to file Form 8027.

If busi­ness is a new busi­ness, and has more than 10 employ­ees who worked more than 80 hours that were typ­i­cally employed on the premises in a typ­i­cal busi­ness day for 2 con­sec­u­tive months, the busi­ness will be required to file form 8027 cov­er­ing the remain­der of the year start­ing with the next pay period after they meet the requirement.

Busi­nesses not required to file form 8027:

• Estab­lish­ments that oper­ated less than 1 month dur­ing the year.
• Estab­lish­ments where tip­ping is not cus­tom­ary such as fast food where 95% of the sales are car­ry­out or cafe­te­rias with a 10% or more ser­vice charge.

Forms 8027 are due on March first of the fol­low­ing year, or March 31 if filed elec­tron­i­cally.  An exten­sion of time to file is requested using form 8809, Appli­ca­tion of Exten­sion of Time to File Infor­ma­tion Returns, and can be filed no later than March 1.  There are penal­ties for fail­ure to file unless the firm can show rea­son­able cause for the delay.

You will be report­ing Gross Receipts.  You may have Non-allocable Receipts for car­ry­out and items for with a 10% or more ser­vice charge that are not included in Gross Receipts.  Com­pli­men­tary Items for which tip­ping is cus­tom­ary must be included in the Gross Receipts; e.g. drinks at a casino, tip­ping is cus­tom­ary – include them in Gross Receipts, fruit bas­ket in hotel room, tip­ping is not cus­tom­ary – do not include them in Gross Receipts.   You must allo­cate tips among employ­ees if total tips reported to you dur­ing any pay­roll period are less than 8% (or the approved lower rate; the bur­den of proof for a lower rate rests with the peti­tion­ing employer). Employers-you need employ­ees to report tips to you. When you allo­cated tips you must include the allo­cated tips on the employee’s W-2, which is due to the employee by Jan­u­ary 31 of the year fol­low­ing.  The instruc­tions for Form 8027 pro­vide spe­cific instruc­tions for com­plet­ing the form.

Tips Reporting-Employees

• The employee must report ALL tips if the employee receives more than $20 per month in tips. The employee may have heard all they need to do is report tips equal to 8% of sales, or 10%, or just charge-card tips. That’s a big myth, and could get the employee in legal trou­ble if they earn more.
• Employ­ees should keep a daily tip diary, so they have a record to show to the IRS to prove earnings.
• Employ­ees need to report tips to their employ­ers if they earn more than $20/month.  They must report these tips by the 10^th day of the month fol­low­ing.  The employer can require report­ing more often….
• The employer needs to know this tip income so they can prop­erly with­hold Social Secu­rity, Medicare and other pay­roll taxes from the employee’s paychecks.
• Fail­ing to report tip income can result­ing in penal­ties, inter­est, a big bill for the unpaid FICA taxes and pos­si­ble jail time.
• Some­times the employee owes more pay­roll taxes than the wages on their pay­check will cover.  The employee may either pay their employer money out of their tips to cover the unpaid Social Secu­rity Taxes avoid­ing under­pay­ment of esti­mate tax penal­ties, OR they may pay esti­mated taxes. The employee also may need to set aside some money to cover their taxes come tax time.

Tips Reporting-Employers

• Employ­ers are required to gather tip reports from their employees.
• The employer is required to pay the employer’s share of taxes on employee tips, and with­hold all pay­roll taxes for tips and wages, from the wages actu­ally paid to the employee.
• Some employ­ers must file form 8027 and allo­cate tips.
• Some­times the employee owes more pay­roll taxes than the wages on their pay­check will cover.  In this case the gov­ern­ment requires the employer to pay with­hold­ing taxes in a cer­tain order. The employer needs to report Uncol­lected Social Secu­rity Taxes on the employee’s w-2.

Are you required to file Form 8027? Are you prop­erly record­ing and with­hold­ing taxes for employee tips?  As always, small busi­ness ser­vices and tax­a­tion are our busi­ness.  If you need help Please give Art & Busi­ness Con­sult­ing a call.  We would love to engage you as a client.

The usual dis­claimers: Although ABC has made every effort to insure the accu­racy of Taxes, Tips and Tools, mis­in­for­ma­tion, dis­in­for­ma­tion, changes, mis­takes, typos and hack­ers hap­pen, there­fore Art & Busi­ness Con­sult­ing LLC takes no respon­si­bil­ity for any action taken or results based on the infor­ma­tion sup­plied here in. The con­tent of this blog gen­er­ally applies to busi­ness and indi­vid­ual tax­a­tion in the United States of Amer­ica.  Inter­nal Rev­enue Ser­vice Cir­cu­lar 230 Dis­clo­sure:  As pro­vided for in Trea­sury reg­u­la­tions, advice (if any) relat­ing to fed­eral taxes that is con­tained in this com­mu­ni­ca­tion (includ­ing attach­ments) is not intended or writ­ten to be used, and can­not be used for the pur­pose of (1) avoid­ing penal­ties under the Inter­nal Rev­enue Code or (2) pro­mot­ing, mar­ket­ing or rec­om­mend­ing to another party any plan or arrange­ment address herein.  Art & Busi­ness Con­sult­ing LLC cur­rently does not have a cer­ti­fied pub­lic accoun­tant, human resource spe­cial­ist, or an attor­ney on staff; this infor­ma­tion is purely for edu­ca­tional pur­poses and not to be con­strued as legal or finan­cial advice. Art & Busi­ness Con­sult­ing LLC and its employ­ees, mem­bers and asso­ciates are not engage to prac­tice law; you always should dis­cuss legal mat­ters with your attor­ney before talk­ing to any­one else.

Tags: 8027 due date, allocated tips, employee tips reporting, employer tips reporting, FICA taxes, Form 4070, Form 8027, Form 8809, information return, IRS audit target, penalties, report 100% of tips, tip income, tips, tips log

This entry was posted on Friday, May 21st, 2010 at 4:12 pm and is filed under Business Taxes, HR Info, Individual Taxes, Other Information. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.