than one payroll period, you must use the payroll period in which the
Lines 1 Through 8
greatest number of workers (both tipped and nontipped) were employed.
Credit card sales. You must complete lines 1 and 2 to report tips and
Line 7b — Gross receipts method. If no good-faith agreement (as
sales (receipts) from credit cards and other credit arrangements.
explained below) applies to the payroll period, you must allocate the
Rounding off to whole dollars. You may round off your money entries
difference between total tips reported and 8% of gross receipts using the
to the nearest dollar. To round off cents to the nearest whole dollar on
gross receipts method (or hours-worked method (line 7a)) as follows:
your form, drop amounts under 50 cents and increase amounts from 50
1. Multiply the establishment's gross receipts (other than
to 99 cents to the next dollar. If you do round off, do so for all amounts.
nonallocable receipts) for the payroll period by 8% (.08) or the lower rate.
But if you have to add two or more amounts to figure the amount to enter
2. Subtract from the amount figured in step 1 the total amount of tips
on a line, include cents when adding and only round the total.
reported by employees who were tipped indirectly for the payroll period.
Line 1 — Total charged tips for calendar year 2000. Enter the total
This difference is the directly tipped employees' total share of 8% (or the
amount of tips that are shown on charge receipts for the year.
lower rate) of the gross receipts of the establishment. Indirectly tipped
Line 2 — Total charge receipts showing charged tips. Enter the total
employees do not receive tips directly from customers. Examples are
sales (other than nonallocable receipts as defined on page 2) from
bussers, service bartenders, and cooks. Directly tipped employees, such
charge receipts that had a charged tip shown. Include credit card
as waitstaff and bartenders, receive tips directly from customers.
charges and other credit arrangements and charges to a hotel room
Employees, such as maitre d's, who receive tips directly from customers
unless your normal accounting practice consistently excludes charges to
and indirectly through tip splitting or pooling, are treated as directly
a hotel room. Do not include any state or local taxes in the amounts
3. For each employee who is tipped directly, multiply the result in
step 2 by the following fraction: the numerator (top number) is the
Line 3 — Total amount of service charges of less than 10% paid as
wages to employees. Enter the total amount of service charges of less
amount of the establishment's gross receipts attributable to the
than 10% that have been added to customers' bills and have been
employee, and the denominator (bottom number) is the gross receipts
attributable to all directly tipped employees. The result is each directly
distributed to your employees for the year. In general, service charges
added to the bill are not tips since the customer does not have a choice.
tipped employee's share of 8% (or the lower rate) of the gross receipts
These service charges are treated as wages and are includible on Form
for the payroll period.
W-2. For details, see Revenue Ruling 69-28, 1969-1 C.B. 270.
4. From each directly tipped employee's share of 8% or the lower
Line 4a — Total tips reported by indirectly tipped employees. Enter
rate of the gross receipts figured in step 3, subtract the tips the employee
reported for the payroll period. The result is each directly tipped
the total amount of tips reported for the year by indirectly tipped
employee's shortfall (if any) for the period.
employees, such as cooks, bussers, and service bartenders.
5. From the amount figured in step 1, subtract the total tips reported
Line 4b — Total tips reported by directly tipped employees. Enter
by both directly and indirectly tipped employees. The result is the amount
the total amount of tips reported for the year by directly tipped
that has to be allocated among the directly tipped employees who had
employees, such as bartenders and waitstaff.
a shortfall for the payroll period as figured in step 4.
In figuring the tips you should report for 2000, do not include tips
6. For each directly tipped employee who had a shortfall for the
received by employees in December 1999, but not reported until
period as figured in step 4, multiply the amount in step 5 by the following
January 2000. However, include tips received by employees in
fraction: the numerator is the employee's shortfall (figured in step 4), and
December 2000, but not reported until January 2001.
the denominator is the total shortfall of all directly tipped employees. The
Line 5 — Gross receipts from food or beverage operations. Enter
result is the amount of allocated tips for each directly tipped employee.
the total gross receipts from the provision of food or beverages for this
Example. A large food or beverage establishment has gross receipts
establishment for the year.
for a payroll period of $100,000 and has tips reported for the payroll
If you do not charge separately for providing food or beverages along
period of $6,200. Directly tipped employees reported $5,700, while
with other goods or services (such as a package deal for food and
indirectly tipped employees reported $500.
lodging), make a good-faith estimate of the gross receipts from the food
or beverages. This estimate must reflect the cost to the employer for
providing the food or beverage plus a reasonable profit factor.
for payroll period reported
Line 6. Enter the result of multiplying line 5 by 8% (.08) or a lower rate
(if the establishment was granted a lower rate by the IRS).
If a lower percentage rate was granted, write the rate in the space
provided and attach a copy of the IRS determination letter.
The 8% rate (or lower rate) is used for tip allocation purposes
only. Using this rate does not mean that directly tipped employees
must report only 8%. They should report the amount of actual tips
$100,000 (gross receipts) X .08 = $8,000
$8,000 - $500 (tips reported by indirectly tipped employees) = $7,500
If you have allocated tips using other than the calendar year, put
an “X” on line 6 and enter the amount of allocated tips (if any) from
your records on line 7. This may occur if you allocated tips based
on the time period for which wages were paid or allocated on a quarterly
of 8% of the gross
8% of gross
Line 7 — Allocation of tips. If 8% (or an approved lower rate) of gross
$7,500..... X 18,000/100,000... =
$7,500..... X 16,000/100,000... =
receipts (line 6) is more than the amount of tips reported by your
$7,500..... X 23,000/100,000... =
employees (line 4c), you must allocate the excess to those employees.
$7,500..... X 17,000/100,000... =
Enter the excess on line 7. There are three methods by which you may
$7,500..... X 12,000/100,000... =
allocate tips. Check the box on line 7a, b, or c to show the method used.
$7,500..... X 14,000/100,000... =
Line 7a — Hours-worked method. Establishments that employ fewer
than the equivalent of 25 full-time employees (both tipped and nontipped
employees) during a payroll period may use the hours-worked method
to allocate tips. You will be considered to have employed fewer than the
equivalent of 25 full-time employees during a payroll period if the
average number of employee hours worked (both tipped and nontipped
8% of the gross
employees) per business day during a payroll period is less than 200
To allocate tips by the hours-worked method, follow the steps for the
gross receipts method below. However, for the fraction in step 3 of the
gross receipts method, substitute in the numerator (top number) the
number of hours worked by each employee who is tipped directly, and
in the denominator (bottom number) the total number of hours worked
by all employees who are directly tipped for the payroll period. See
$8,000 less $6,200 (total tips reported) = $1,800 (amount
Regulations sections 31.6053-3(j)(19) and 31.6053-3(f)(1)(iv) for details.
allocable among employees who had a shortfall)
If you use the hours-worked method, be sure to enter in line 7a the
average number of employee (both tipped and nontipped) hours worked
per business day during the payroll period. If the establishment has more