If you have employees who regularly receive tips from providing, delivering, or serving food or beverages for consumption, you may be required to file a reconciliation return with the Internal Revenue Service (IRS). The IRS has developed Form 8027 – Employers Annual Information Return of Tip Income to review the handling of tips and income associated with tips.
To determine if your company is required to file this information return, here are some guidelines:
- Is there food or beverages provided for consumption on the premises?
- Is tipping customary for this service?
- Do you have over 10 employees working more than 80 hours in a typical business day? You need to review the prior year to determine if you file in the current year. The average hours for a given period determine how many employees are working, not the actual employees on staff.
To determine if the company meets the employee requirements, you can follow this calculation:
- Total all hours worked for staff for a particular period. (For example, a month, quarter, or year)
- Divide the total hours by the number of days in that period. This will give you the average number of daily hours worked. If this exceeds 80, you must file.
Example 1:
If the total hours worked by staff in a month with 31 days is 1,457, you would calculate the following:
1,457/31 = 47 average daily hours. You would not be required to file, and it has been determined you have less than 10 employees.
Example 2:
If the total hours worked by staff in a month with 31 days is 2,950, you would calculate the following:
2,950/31 = 95 average daily hours. You would be required to file, and it has been determined you have more than 10 employees.
The purpose of Form 8027 is to determine if employees are receiving sufficient tips from the gross receipts reported. Per the IRS, they should receive a minimum of 8% tips unless the business has been granted a lower allocation rate to apply. If they do not receive 8%, the employer must allocate more sales to tips among the employees.
Here are some important tips on preparing this form:
- Gross receipts include all cash and charge receipts, hotel room charges, and complimentary food or beverages. They do not include non-allocable receipts, which exclude sales for carryout and receipts with an added service charge of 10% or more.
- In addition, non-allocable receipts are receipts on sales where tipping is not customary.
- Charged receipts do not include ones with “gratuities” included.
- Additionally, charged receipts do not include those with no tip charged. The IRS considers these cash receipts.
- Tips will be reported for direct employees and indirect employees.
- The Form is due by February 28 (or March 31 if filed electronically).
The Point of Sale (POS) system can be helpful in collecting the needed information. you may need to make adjustments to your system with how tips are allocated and recorded.
Understanding tip credits and the requirements for filing IRS Form 8027 can be complex, even for experienced business owners. If your employees regularly receive tips for serving food or beverages, it’s crucial to ensure proper reporting and compliance with tip income regulations. To navigate these challenges, it’s highly recommended to work with an accounting professional who specializes in the restaurant industry. If you have any questions or need further assistance, feel free to reach out to us.