Tips on Tip Allocation - IRS Form 8027
Unreported Tips are a big IRS tracking issue. It is estimated that billions of tip income goes unreported by employees and employers every year. Not only do employees have to report receiving $20 or more in tips each month to their employer, their employer must annually report to the IRS receipts and tips from their large food or beverage establishments on IRS Form 8027. A large food or beverage establishment is defined as a business that "normally employed more than 10 employees on a typical business day during the preceding calendar year. The IRS calls this "the 10-employee test."
In order to determine if your business meets the 10-employee test you'll need to follow the instructions for Form 8027. If the test reveals you had more than 10 employees in the preceding calendar year, you'll need to complete and file Form 8027. When completing the form there are some additional information you'll need to capture such as, gross receipts for each month, credit card sales, cash and charge tips, as well as, any service charges.
As you near the bottom of Form 8027 and total Line 7, you'll find out if tips need to be allocated to your employees. If so, you'll need to make sure each of the employees receiving a tip allocation has box 8 of their W2 populated with their amount before you distribute to the employee by January 31st.
Earlier this year Forensic Payroll Consultants assisted a client in Oklahoma respond to IRS notices for 2015, 2016, and 2017 because they failed to file the form for those years. We ran the 10-employee test, helped them complete the form, and responded to the notice.
If you or your client needs assistance with Form 8027 or help determining the number of employees, please contact us at email@example.com