What You Need to Know About Tip Reporting

February 12th, 2010 | Author: Linda Silva

The IRS is working hard to find lost revenue. Non-reported or under reported income by restaurant workers is under scrutiny. Restaurants owners have the critical tasks of keeping records on tips received and compelling employees to report tips.

All employees receiving $20.00 or more a month in tips must report 100% of their tips to their employer and are required to pay taxes on all their wages including tips.

From the Employers perspective here are the three basic things that you need to know if you employ tipped workers:

You are required to receive a tip report from each employee once a month. It must include the name of the employer, the employee’s name, address, social security number, the date of the report, period covered in the report and the report must be signed by the employee. In practice, you should receive a tip report for every payroll period, otherwise you cannot correctly report the employee’s total wages or accurately calculate taxes.
You need to withhold Income and FICA tax from each paycheck, report each employee’s tips to the IRS and pay your share of FICA tax. Employee tip information will also be included on your “Employers Quarterly Payroll Tax Return” (Form 941), “Wage and Tax Statement” (Form W2), “Employer’s Annual Federal Unemployment (FUTA) Tax Return” (form 940) and generally on your state income and unemployment reporting forms. In certain cases you may need to “allocate” additional wages for an employee if he or she has failed to report sufficient tip income.
You need to file IRS Form 8027 at the end of each year if your business is fits the IRS’s definition of a “large food or beverage establishment.” Form 8027 summarizes the restaurants total sales, charged sales, charged tips and total reported tips.

A large food or beverage establishment is defined as one to which all of the following apply:

Food or beverage is provided for consumption on the premises.
Tipping is a customary practice.
More than 10 employees who work more than 80 hours were normally employed on a typical business day during the preceding calendar year.

How to determine whether to File Form 8027 (IRS requirements for 2009)

Complete the information below to determine if you had more than 10 employees on a typical business day during 2008 and, therefore, must file Form 8027 for 2009. The filing requirement (more than 10 employees) is based on the total of all employees who provided services in connection with the provision of food and beverages at the establishment, not just the number of directly tipped employees. Include employees such as wait staff, bussers, bartenders, seat persons, wine stewards, cooks, and kitchen help. 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.

Enter one-half of the total employee hours worked during the month in 2008 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 2008 with the least aggregate
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 2009

A person who owns 50% or more in value of the stock of a corporation that runs the establishment is not considered an employee when determining whether the establishment normally employs more than 10 individuals.

Pit Falls

Form 8027 is organized in such a way as to highlight any shortfall of reported tips below 8% of gross receipts from food and beverage sales. Don’t be misled by the 8% figure. Just because this is the “threshold” number that the form uses to require you to allocate additional tip income does not mean that this is all you need to report to be safe from an IRS audit. The law requires your employees to report 100% of tip income and the 8% threshold is only one way that the IRS monitors compliance in reporting restaurants. This line item is red flag to the IRS indicating that your employees may not be reporting all their tips. In fact, if your total reported tips are less than 8% of total food and beverage sales, then you must allocate additional tip income to the W2 of every tipped employee that reported less than 8% of their respective sales, so that their total reported income reflects this minimum 8% allocation.

Tip Allocation

There are three methods of allocating additional employee tips: hours worked, gross receipts, or a good faith agreement.

The Hours Worked method applies only to restaurants which employ fewer than 25 full time employees during a payroll period, and it allocates any tip shortfall (below 8% of total sales) by spreading it among under reporting servers based on their percentage of total hours worked as compared to all the other servers. This method is the least accurate as it does not take into account the fact that servers work shifts with different tipping patterns.

The Gross Receipts method can be used by any restaurant and usually results in a more accurate and fair allocation. It determines the amount that each server should have reported in tips to reach the 8% minimum threshold by comparing the server’s gross receipts as a percentage of the total restaurant receipts. If the server’s actual reported tips are less than the percentage calculated as above then a prorate portion of the total shortfall is allocated to that employees W2.

The Good Faith Agreement method is rarely used.

For a detailed explanation of each method go to: http://www.irs.gov/pub/irs-pdf/i8027.pdf.

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