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February 28, 2022

Tax on Tipping: How Restaurants and Bars Should Report Employee Tips

In most restaurants and bars, employees have the potential to earn a majority of their wages in tips. To make sure this tipped income is reported for tax purposes, certain food and beverage establishments are required to file Form 8027 at tax time. Below we dig into the details of who, when and how to file Form 8027 and additional information the food and beverage industry should know.

What is Form 8027?

Form 8027 is an annual report that is filed to the IRS containing the receipts and tips from large food or beverage establishments. In addition to using Form 8027 to track total tips brought in by establishments, it is also used to help determine if they need to allocate more tips to certain employees.

Do I need to report tips?

Form 8027 is not required for every food and beverage establishment, but it’s necessary for what the IRS determines as “large establishments”. To determine if your restaurant or bar falls under this category, the IRS has created Form 8027 guidelines to help. They define a “large food or beverage establishment” as a food or beverage operation that meets the following criteria:

  1. Located in the 50 states or in the District of Columbia
  2. Where tipping of food or beverage employees by customers is customary, and
  3. Employer employed more than 10 employees on a typical business day during the preceding calendar year

If these three guidelines are met, then the establishment will need to file a Form 8027. This form is not applicable to any fast-food restaurant operations, which also includes establishments in which customers order, pay at the counter and then pick up their own food.

How do I file Form 8027?

When this form is filed it will need to include information pertaining to the business, such as the business’s name, address, EIN, type of establishment along with monetary amounts relating to the charged sales/receipts, total sales/receipts, charged tips, and total tips. On the form, there are separate lines for indirect and direct tipped employees. A direct tipped employee is someone who received the tip straight from the customer, such as a waitress. An indirectly tipped employee would be someone like a cook who receives the tip from other employees, not the customer.

For those paper filing Form 8027, the filing deadline is February 28th.  For those filing Form 8027 electronically, which is strongly encouraged by the IRS, the filing deadline is March 31st.   If more time is needed to complete and file Form 8027, you can file Form 8809 with the IRS to get an automatic 30-day extension to do so.

Do you have questions about Form 8027 or tax filing for your establishment? Anders has Lodging, Food and Beverage advisors that can work with you on tax planning, business decisions and analysis of restaurant operations and cashflow. Contact an Anders advisor below to learn more.

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