The National Restaurant Association's
Tip Reporting
Education Kit
has tools to help everyone in the restaurant — from managers to servers — understand tip reporting. |
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What you need to know if you EMPLOY tipped workers
1. You are required to gather employees' tip reports.
The IRS requires any employee who receives more than $20 per month in tips to report those tips to his or her employer at least once a month. Tip reports are due to employers by no later than the 10th of the month for the previous month's tips. Employers can require reports even more frequently, such as at the end of every shift, every day, or every week. The IRS requires specific information in employee tip reports. IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, contains a form employees can use. Download the publication in English (PDF) or Spanish (PDF) from the IRS Web site.
2. You must report your employees' tips to the IRS and withhold taxes.
Employers are required to pay the employer's share of payroll taxes on tips, plus withhold all the required income and FICA and other payroll taxes on wages and reported tips from wages actually paid the employee.
At the end of each year, employers are required to total each employee's reported tips for the year and record this amount on the employee's W-2 form as "wages," along with cash wages. In some cases, employers will also be required to "allocate" tips to certain employees on employees' W-2 forms if they have not reported a sufficient amount of tips; read on for more information.
3. Certain employers must file Form 8027 with the IRS — and, in some cases, "allocate" tips.
If your restaurant meets three criteria — (1) tipping is customary in your establishment, (2) you serve food and drink for on-premises consumption, and (3) you employ more than ten employees or their equivalent (more than 80 employee hours) on a typical day — you must file IRS Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, with the IRS each February. On this form, you report annual totals for your restaurant's sales, charge-card sales, charge-card tips, and reported tips.
If you are an 8027 filer and the total tips your employees report for the pay period or the year don't add up to 8% of your restaurant's sales, you must also go through what's called "tip allocation." This process — which points the IRS toward restaurants where employees may not be reporting all their tips — requires you to "allocate" tips to any directly tipped employees who reported tips of less than 8% of his or her sales. You do not withhold taxes on allocated tips. You simply show total allocated tips on your Form 8027, and note the allocations to specific employees on their W-2 Forms. Allocation can get complicated: Check the Form 8027 or the National Restaurant Association's Tip Reporting Education Kit for full details on Form 8027 and tip allocation.
4. A word to the wise: Employers, educate your employees!
No restaurateur wants to be in the business of policing employees' tip reports, since it's the employees' responsibility to report and pay taxes on their tips. However, there's good reason for employers to make sure employees understand 100% tip reporting: Underreporting can make both you and your employees vulnerable to an IRS audit. The law says employers owe FICA taxes on all the tips their employees receive, whether they are reported or not.
More tip-reporting resources
Last updated February 2002
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