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.