What is Form 8027? What Businesses Should Know about Reporting Tip Income
If you have a restaurant or food service business, you have to report tips in addition to figuring out your taxes and payroll. It can be confusing if you’re new to the industry—but we’re here to help. This blog post will walk you through the process of filling out and filing IRS Form 8027.
What is IRS Form 8027?
The Internal Revenue Service (IRS) uses Form 8027—also known as Employer’s Annual Information Return of Tip Income and Allocated Tips—to track the total amount of tips brought in by large food or beverage establishments during the year.
Food service businesses also use this document to determine if they need to allocate more tips toward certain employees, and if so, to calculate the amount owed.
Who needs to file Form 8027?
Food and beverage establishments that meet the criteria below are required to file Form 8027 with the IRS. The business must:
- be located in the 50 states or in the District of Columbia
- employ food and beverage workers who usually receive tips from customers
- employ more than 10 employees on a typical business day
The IRS defines a food and beverage operation as a “business activity that provides food or beverages for consumption on the premises, other than fast food operations.” Fast food businesses are ones where customers order, pick up, and pay for their food and drinks before carrying their purchases themselves to a table on the premises or to another location.
If you’re unsure whether your business meets the tipping requirement above, the IRS has established another guideline to help you out. If your business serves food cafeteria-style or adds a service charge of 10% or more on 95% of its total sales (aside from carryout), your customers likely don’t pay any tips.
The 10-employee test
To figure out if your business meets the third requirement, you’d use what’s called the 10-employee test. The name can be somewhat misleading though—instead of counting the number of employees working on a typical business day, the IRS uses the average number of employee hours worked on a typical business day instead.
To determine if your business qualifies, fill out this simple worksheet from the IRS.
When going through the exercise, make sure to count all of your employees, not just the ones who handle the food and beverage operations or the ones that receive tips. Once you’re done, you can keep the worksheet for your records—the IRS doesn’t need you to turn it in.
Q: How Do I Calculate a Tip Credit?Finances and Taxes
How to fill out Form 8027
Filling out Form 8027 correctly starts with maintaining accurate records of your tip income, including receipts from your business and employee tip records.
For instance, employees who make $20 or more a month in tip income must use Form 4070 to report their tips to you each month. You’ll want to keep these forms as proof of their tip income in case of an audit.
The IRS may also use the information you provide to check that you’ve withheld the correct amount in taxes from your employees’ tip income. To double-check your work (and that of your employees), you can use this IRS worksheet to see if your staff are reporting all of their tip income. Keep in mind that, although this exercise can be helpful in determining whether tips are being accurately reported, it won’t give you a guaranteed answer.
Once you have all the information you need, filling out the tax form itself becomes a relatively straightforward task.
Don’t toss out your records once you’ve submitted your forms though—you may need them later on if the IRS asks you to verify the information you’ve provided. As a general rule of thumb, keep any relevant records (such as receipts, copies of tax forms, and employee tip reports) for at least three years after submitting your returns.
What Form 8027 looks like
IRS Form 8027 is made up of two main sections.
The first one asks for general information about your business, including:
- The name and address of your establishment
- Your Employer Identification Number (or EIN, for short)
- The name and address of the employer (you)
- The establishment’s location number, if you’re reporting multiple operations under a single EIN
- The kind of food or beverage products you serve
You’ll use the second part of the form to report the total amount of tips your business received during the tax year.
Directly under the employer name and address sections is a question asking whether your business accepts credit cards, debit cards, or other charges. If the answer is yes, check the corresponding box and fill out lines 1 and 2 underneath, even if your answer is zero. If not, check No and skip to line 3.
Lines 4a and 4b ask you to separate tips received by directly and indirectly tipped employees. For context, directly tipped employees are those who receive tips directly from customers—think waiters and bartenders. In comparison, indirectly tipped employees like bussers and cooks receive their tips from other employees, often through a tip-sharing arrangement put in place by their employer.
Line 7: Tip allocation for employees
If the total amount of tips reported by your employees during a payroll period comes out to less than 8% of your gross receipts for that same period, you may need to allocate additional tips to your directly tipped employees until the difference is made up.
The IRS offers three ways for you to calculate your tip allocation threshold:
- The hours-worked method
- The gross receipts method
- The good-faith method
Follow the steps for your method of choice (outlined in the IRS tax form instructions), check the box next to the method you used in line 7 of Form 8027, and add any details from your calculations to the document if needed. Don’t forget to add the allocated tips to each directly tipped employee’s W-2 too.
If you need to, you may also request a lower rate from the IRS. If your petition is approved, use the new rate they give you to recalculate tip allocations for your employees.
How to request a lower tip allocation rate from the IRS
According to the IRS, you or a majority of your employees can request a lower tip allocation rate (less than 8% but no lower than 2%) by mailing a petition to the following address:
Internal Revenue Service
National Tip Reporting Compliance
3251 North Evergreen Dr. NE
Grand Rapids, MI 49525
This petition must include information demonstrating why your business should receive a lower rate, including:
- The employer’s name, address, and EIN
- The establishment’s name, address, and establishment number
- A detailed description of the establishment, including the type of the restaurant it is, days and hours of operation, the type of service offered, who receives the check from the customer, whether the check is paid before or after the meal, and if alcohol is sold by the establishment
- Copies of the establishment’s Form 8027 for the past three years, if any
- A detailed breakdown of the establishment’s finances, including total carryout sales; total charge sales; percentage of sales for breakfast, lunch, and dinner; average transaction amount; service charges (if any); and percentage of sales with a service charge (if any)
- The kind of customers at your establishment
- A copy of a representative menu for each meal
Employers filing a petition must also include a check or money order payable to “United States Treasury” for the user fee needed for the determination letters. The fee amount changes every year, so you may want to review Appendix A of the first revenue procedure of the year for the updated amount. (See Appendix A of the Internal Revenue Bulletin for January 2021 for an example of the user fees in 2021.)
Finally, the petition must include the following statement signed by someone authorized to sign and submit an information return on behalf of the company:
“Under penalties of perjury, I declare that I have examined this petition, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this petition are true, correct, and complete.”
If your employees want to submit a petition instead, they’ll need the consent of over half of all the directly tipped employees currently working at your business to do so. This is important because this request will directly impact how much allocated tip income they’ll receive for the lifespan of the new rate, if approved.
If the IRS approves your petition, you’ll receive a determination letter letting you know what your new lower rate is and how long it’s effective for.
Attach a copy of this document to Form 8027 if you’re submitting it via mail. If you’re filing electronically, review Publication 1239 for instructions on how to submit a copy of your determination letter with your form.
When is Form 8027 due to the IRS?
If you plan on filing Form 8027 by mail, submit the tax document along with Form 8027-T (if you need to file more than one Form 8027) and any attachments to the following address by February 28:
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201
If you need to file 250 or more Forms 8027, though, the IRS requires you to submit them electronically via the Filing Information Returns Electronically (FIRE) system by March 31. You can also submit your forms electronically even if you don’t meet the e-filing requirement, as it’s recommended by the IRS. For more information on e-filing Form 8027, see Publication 1239.
But no matter how well you stay on top of your deadlines, sometimes the unexpected happens. If you need more time to submit your 8027 tax form, you can request a deadline extension by filing Form 8809 with the IRS.
Those who plan on mailing their tax forms to the IRS have until February 28 to file their extension, while e-filers have until March 31 to do so. If the IRS accepts your request, you’ll get an automatic 30-day extension for your deadline. Just make sure to attach a copy of your submitted Form 8809 when you do file Form 8027.
How to report allocated tips to employees
If you’ve filled out Form 8027 and determined that you need to allocate tips to your employees, you’ll need to give each of your directly tipped employees a Form W-2 with the allocated amount written in box 8. Make sure not to combine it with their regular wages or otherwise withhold taxes on this amount—your employees must do it on their own.
You’ll also want to double check that the allocated amount reported on each W-2 is correct. If the number differs from the correct allocation by more than 5%, you must correct it and review the W-2s of the other employees to ensure that the mistake didn’t affect their allocations as well.
Once you’ve finished up with the tip allocations, furnish the completed W-2 tax documents to your employees by January 31 as usual.
Penalties for misfiling Form 8027
Depending on the situation, you may get hit with a number of penalties if you miss the Form 8027 filing deadline, submit incorrect information, or fail to furnish these forms to your employees on time if you don’t have an acceptable reason for the delay.
After all, you need to determine if you owe your employees any allocated tips before you can send out their W-2s—meaning that their tax returns (and yours) depend on you filling out Form 8027 correctly and on time.
If you don’t, you may be fined for every failure to:
- File Form 8027 correctly and on time
- File W-2s correctly and on time
- File any of the above information returns electronically, if you’re required to
- Furnish correct W-2s to every employee on time
For example, let’s say Stan owns a restaurant, but things got so busy he filed Form 8027 after the deadline. As a result, he also missed the W-2 filing and furnishing deadlines for 10 of his employees because he needed to allocate their tips too.
Stan would then receive multiple penalties from the IRS—one for not filing Form 8027 on time, 10 for not meeting the W-2 filing deadlines for his 10 employees, and another 10 for not meeting the W-2 furnishing deadline for those same workers.
As you can see, these fines can add up rather quickly so it’s important that you file accurate and timely documents (or request an extension if you need to). For more information on the penalties for misfiling Forms 8027 and W-2, review the General Instructions for Forms W-2 and W-3 as well as the General Instructions for Certain Information Returns from the IRS.
Running a successful restaurant or food service business isn’t easy, and neither is ensuring the satisfaction of your most discerning customers. But your employees make this possible every day, and it’s important to make sure they’re fairly compensated for their efforts.