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 10th 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.
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