What Is IRS Form 8027 and Who Needs to File It?
Understand the employer's role in reporting employee tips. This guide covers the IRS compliance process for reconciling and allocating tip income via Form 8027.
IRS Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, is used by certain employers to report a detailed summary of employee tip income. This form is filed for operations within large food or beverage establishments. The information helps the IRS track tip income and helps employers determine if they must allocate additional tips to their staff.
Determining if You Must File
A business must file Form 8027 if it is a “large food or beverage establishment,” which requires meeting three IRS criteria. First, the business must provide food or beverages for on-premises consumption and be located in the 50 states or the District of Columbia. This rule excludes fast-food operations where customers order and pay at a counter.
Second, tipping must be a customary practice for the services provided. Tipping is not considered customary if 95% or more of total sales have a service charge of 10% or more.
The third requirement is the “more than 10 employee test.” To determine this, an employer totals the hours worked by all employees and divides that number by the business days in the preceding year. If the result is more than 80 employee-hours per business day, the establishment must file Form 8027. It is important to include all employees in this calculation, not just those who directly serve food or beverages.
Information Required for Form 8027
An employer must gather specific financial data from their annual records to complete Form 8027. A primary figure is the total gross receipts from food and beverage operations, excluding carryout sales and sales with a service charge of 10% or more. The value of complimentary items, such as free drinks provided in a casino, must be included in gross receipts if tipping is customary for those items.
The employer must also report the total amount from charge receipts that included a charged tip. This includes the sum of all credit, debit, and other charged sales where a customer added a gratuity. The form also requires the total of all service charges of less than 10% paid as wages and the total tips reported by all employees for the year.
Calculating and Allocating Tips
An employer must determine if the total tips reported by employees meet a minimum threshold, which is 8% of the establishment’s gross food and beverage receipts. To do this, the total gross receipts figure is multiplied by 0.08. An employer can apply for a lower rate from the IRS, but it cannot be less than 2%; a copy of the IRS determination letter must be attached to the form if approved.
If the total tips reported are less than the 8% minimum, the employer must allocate the shortfall among certain employees. The allocation is made only to directly tipped employees, such as servers and bartenders, who receive tips from customers. No allocation is made to indirectly tipped employees, like bussers or cooks, or to employees who reported tips at or above the 8% threshold.
The IRS permits three methods for allocating the tip shortfall. These include the gross receipts method, which distributes the shortfall based on each server’s share of total gross receipts, and the hours-worked method, which allocates based on hours worked. A third option is a good-faith agreement, which requires a written consensus between the employer and at least two-thirds of the directly tipped employees. The allocated tip amount must be reported in Box 8 of the employee’s Form W-2.
The Filing Process
The deadline for paper filing Form 8027 is the last day of February of the year following the calendar year being reported. For electronic filers, the deadline is extended to March 31. Employers filing 10 or more information returns in aggregate, including W-2s and 1099s, must file Form 8027 electronically.
Electronic submission is done through the IRS’s Filing Information Returns Electronically (FIRE) system. Using the FIRE system requires a Transmitter Control Code (TCC), which is obtained by registering through the IRS website.
A separate Form 8027 must be filed for each business location. When filing multiple paper forms, the employer must also include Form 8027-T as a transmittal summary. An extension can be requested by submitting Form 8809 before the original due date.
Penalties for Non-Compliance
Failing to file Form 8027 when required, or filing an incorrect form, can lead to IRS penalties. The amounts are adjusted for inflation and depend on how late the correct form is submitted. For returns due in 2025, penalties range from $60 to $310 per form, with a maximum of over $1.2 million per year for large businesses.
If the failure to file is intentional, the penalty can be much higher. Penalties can also be assessed for each corrected Form W-2 that must be issued to employees due to errors on Form 8027. The IRS may waive penalties if the employer can show the failure was due to a reasonable cause and not willful neglect.