Hospitality is one industry where many employees earn the majority of their wages through tips. If you operate such a business, you will need to withhold taxes for your employees for the tips that they earn. This is in addition to what you withhold from their salary or hourly pay. Form 8027 is what you’ll use to report the tips employees earn.
When Is Form 8027 Required?
Most “large” food and beverage establishments in the United States must file Form 8027. Whether or not your establishment must file this form is easily determined. The IRS has a worksheet to help you figure it out. Basically, you need to answer these questions:
Is it customary for your employees to accept tips?
Do you normally employ more than 10 employees on a typical business day?
If you answer yes to these questions, you most likely need to file Form 8027. You’re also likely going to have to file if you need to allocate tips to your employees. Of course, there are some details to keep in mind. First, the IRS makes it clear that service charges aren’t tips. Also, fast-food operations do not count.
When determining whether or not you need to file this form, the IRS details a few nuances too. For instance, you must include all employees of your operation when filling out the worksheet. Regardless of their position or if they receive tips, you must count every employee.
Additionally, even if you have fewer than 10 employees, you might still have to file. That’s because, as the IRS puts it: “It is the average number of employee hours worked on a typical business day that determines whether or not you employed more than 10 employees.”
Obviously, that can make determining your filing requirement a bit more of a hassle. The “10-employee test” is what the IRS uses to help a business determine if they must file Form 8027. Here it is:
Enter one-half of the total employee hours worked during the month in 2017 with the greatest aggregate gross receipts from food and beverages.
Enter the number of days opened for business during the month shown in line 1.
Enter one-half of the total employee hours worked during the month in 2017 with the least aggregate gross receipts from food and beverages.
Enter the number of days opened for business during the month shown in line 3.
Divide line 1 by line 2.
Divide line 3 by line 4.
Add lines 5 and 6. If line 7 is greater than 80 (hours), you must file Form 8027 for 2018.
For the purposes of this test, some stock holders do not count. For instance, if someone owns more than 50% in value of your corporation’s stock, the IRS says do not count them as an employee in the above test.
The Steps for Filing Form 8027
Filing Form 8027 isn’t all that difficult. Once you know that you must file it, it’s just a matter of getting paperwork in order. Of course, it’s impossible to fill out Form 8027 appropriately if your employees fail to report their tip income accurately. You should get monthly tip reports from each tipped employee.
Without such reports, you will not be able to properly file all of the forms your business needs to send in. If the IRS notices discrepancies in the amount of tip income you report versus your employees, that raises a red flag. It’s important to educate your employees on the importance of properly reporting tips.
When you go to fill out Form 8027, you will need to enter some basic information about your establishment. This includes your Employee Identification Number (EIN) so that the IRS can track your filing. You also need to inform the IRS on whether you accept credit card payments or not.
Additionally, you must tell them what products you serve. As a restaurant, the product you serve might be breakfast, lunch, and/or dinner. Alternatively, you might be a cafe selling coffee and pastries. You must fill this part of the form out accurately.
The form’s primary section will ask you financial questions. In this section, you must report all tips your business has received. You will have to separate the numbers for your employees who get direct tips and those who get indirect tips. If you don’t know the difference, here’s a quick explanation.
An employee who receives direct tips is just what it sounds. That’s an employee who gets tipped directly by a customer. Examples include wait staff and bartenders. On the other hand, you might also have employees who receive indirect tips. These are employees who get tips from other employees. For instance, you might share a portion of the wait staff’s tips with the bussers and cooks.
Form 8027 will also help you determine whether or not you must allocate tips to your directly tipped employees. If your employees report receiving less than 8% of your gross receipts in tips, you must allocate tips to them. You have a few methods for calculating allocated tips. You must record the method you use for calculating any allocated tips on Form 8027.
The amount of allocated tips should go into box 8 on each employee’s W-2. Don’t make the mistake of adding allocated tips to an employee’s wages. You should also not withhold taxes for allocated tips. This is the responsibility of individual employees.
Don’t Get Hit With a Fine
As a food and beverage establishment, you are subject to a lot of laws, forms, and regulations. And, failing to file a form properly could result in big penalties. For instance, if you do not file Form 8027 when you should you could receive hefty fines. Filing it incorrectly will also lead to you filling out employees’ W-2 forms incorrectly. All of that will really cost you in frustration and finances.
If you begin to feel overwhelmed, Honest Buck Accounting can help. We specialize in helping to lessen the tax burden of food and beverage establishments. With our help, you can stop worrying about the books and start focusing on your customers.