Restaurateurs face a February 28, 2005 deadline for filing tip information with the Internal Revenue Service, using Form 8027, Employer's Information Return of Tip Income and Allocated Tips. If you are filing electronically the deadline is March 31.
The filing requirement covers only those restaurants where tipping is customary, where food or drinks are served for on-premise consumption, and which employ 10 or more full-time employees or their equivalent (80 employee hours) on an average day. This calculation includes all employees, not just tipped employees. The IRS created Form 8027 in 1983 as a way to get more information from restaurateurs about the amount of tips their employees report. On the form restaurateurs are required to provide information on total sales, charged sales, charged tips and reported tips.
If you own more than one establishment, you must file Form 8027 for each one. There may be more than one establishment (business activity providing food or beverages) operating within a single building, and, if gross receipts are recorded separately, each activity is required to file a Form 8027. Employers failing to file Form 8027 on time will be subject to penalty, unless reasonable cause for the delay is established. Employers filing late (after the due date including extensions) must attach an explanation to the return to show reasonable cause.
Some restaurateurs who complete Form 8027 will be required to supply even more information to the IRS. This extra requirement applies to restaurants where total reported tips do not equal at least 8% of the restaurant's gross sales. In these cases, employers must "allocate" tips to all those directly tipped employees who reported less than their share of 8% of the establishment's food and beverage sales.
The amount allocated is generally the difference between the total tips reported by the employees and 8% of the restaurant's gross receipts.
The IRS has formulas for figuring tip allocation. Allocated tips must also be listed on employees' individual W-2 forms.
The 8% myth
There is a common misconception in the restaurant industry that as long as employees report 8% of their tips, they will have no problems with the IRS. Your employees should be reporting 100% of their tips. Seeing 8% across the board from your employees actually raises a red flag for the IRS. Another red flag is discrepancies in tip amounts. For example, if the IRS agents see that on credit card charge slips an employee typically receives tips close to 15% but the same employee reports cash tips of 5%, they will assume something is wrong. Educate your employees about proper tip reporting. RHAI has materials available for you.
If you would like a copy of Form 8027 and its instructions click here http://www.irs.gov/instructions/i8027/ch01.html or call the RHAI Hotline, 800 678-1957.