Employer’s name and address. Enter the name and address of the
To allocate tips by the hours-worked method, follow the steps for the
entity or individual whose EIN is shown above. Enter foreign addresses
gross receipts method below. However, for the fraction in step 3 of the
as follows: city, province or state, and country. Do not abbreviate 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
Establishment number. Enter a five-digit number to identify the
by all employees who are directly tipped for the payroll period. See
individual establishments that you are reporting under the same EIN.
Regulations sections 31.6053-3(j)(19) and 31.6053-3(f)(1)(iv) for details.
Give each establishment a separate number. For example, each
establishment could be numbered consecutively, starting with 00001.
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
Lines 1 Through 8
per business day during the payroll period. If the establishment has
more than one payroll period, you must use the payroll period in which
Credit card sales. You must complete lines 1 and 2 to report tips and
the greatest number of workers (both tipped and nontipped) were
sales (receipts) from credit cards and other credit arrangements.
Rounding off to whole dollars. You may round off your money entries
Line 7b — Gross receipts method. If no good-faith agreement (as
to the nearest dollar. To round off cents to the nearest whole dollar on
explained below) applies to the payroll period, you must allocate the
your form, drop amounts under 50 cents and increase amounts from 50
difference between total tips reported and 8% of gross receipts using
to 99 cents to the next dollar. If you do round off, do so for all amounts.
the gross receipts method (or hours-worked method (line 7a)) as follows
But if you have to add two or more amounts to figure the amount to
(see example on page 4):
enter on a line, include cents when adding and only round the total.
1. Multiply the establishment’s gross receipts (other than
Line 1 — Total charged tips for calendar year 2001. Enter the total
nonallocable receipts) for the payroll period by 8% (.08) or the lower
amount of tips that are shown on charge receipts for the year.
Line 2 — Total charge receipts showing charged tips. Enter the
2. Subtract from the amount figured in step 1 the total amount of
total sales (other than nonallocable receipts as defined on page 2) from
tips reported by employees who were tipped indirectly for the payroll
charge receipts that had a charged tip shown. Include credit card
period. This difference is the directly tipped employees’ total share of
charges and other credit arrangements and charges to a hotel room
8% (or the lower rate) of the gross receipts of the establishment.
unless your normal accounting practice consistently excludes charges
Indirectly tipped employees do not receive tips directly from customers.
to a hotel room. Do not include any state or local taxes in the amounts
Examples are bussers, service bartenders, and cooks. Directly tipped
employees, such as waitstaff and bartenders, receive tips directly from
Line 3 — Total amount of service charges of less than 10% paid
customers. Employees, such as maitre d’s, who receive tips directly
as wages to employees. Enter the total amount of service charges of
from customers and indirectly through tip splitting or pooling, are treated
less than 10% that have been added to customers’ bills and have been
as directly tipped employees.
distributed to your employees for the year. In general, service charges
3. For each employee who is tipped directly, multiply the result in
added to the bill are not tips since the customer does not have a choice.
step 2 by the following fraction: the numerator (top number) is the
These service charges are treated as wages and are includible on Form
amount of the establishment’s gross receipts attributable to the
W-2. For details, see Revenue Ruling 69-28, 1969-1 C.B. 270.
employee, and the denominator (bottom number) is the gross receipts
Line 4a — Total tips reported by indirectly tipped employees.
attributable to all directly tipped employees. The result is each directly
Enter the total amount of tips reported for the year by indirectly tipped
tipped employee’s share of 8% (or the lower rate) of the gross receipts
employees, such as cooks, bussers, and service bartenders.
for the payroll period.
4. From each directly tipped employee’s share of 8% or the lower
Line 4b — Total tips reported by directly tipped employees. Enter
rate of the gross receipts figured in step 3, subtract the tips the
the total amount of tips reported for the year by directly tipped
employee reported for the payroll period. The result is each directly
employees, such as bartenders and waitstaff.
tipped employee’s shortfall (if any) for the period.
In figuring the tips you should report for 2001, do not include tips
5. From the amount figured in step 1, subtract the total tips
received by employees in December 2000, but not reported until
reported by both directly and indirectly tipped employees. The result is
January 2001. However, include tips received by employees in
the amount that has to be allocated among the directly tipped
December 2001, but not reported until January 2002.
employees who had a shortfall for the payroll period as figured in
Line 5 — Gross receipts from food or beverage operations. Enter
6. For each directly tipped employee who had a shortfall for the
the total gross receipts from the provision of food or beverages for this
period as figured in step 4, multiply the amount in step 5 by the
establishment for the year.
following fraction: the numerator is the employee’s shortfall (figured in
If you do not charge separately for providing food or beverages
step 4), and the denominator is the total shortfall of all directly tipped
along with other goods or services (such as a package deal for food
employees. The result is the amount of allocated tips for each directly
and lodging), make a good-faith estimate of the gross receipts from the
food or beverages. This estimate must reflect the cost to the employer
Line 7c — Good-faith agreement. An allocation can be made under
for providing the food or beverage plus a reasonable profit factor.
a good-faith agreement. This is a written agreement between you and
Line 6. Enter the result of multiplying line 5 by 8% (.08) or a lower rate
at least two-thirds of the employees of each occupational category of
(if the establishment was granted a lower rate by the IRS).
employees who receive tips (e.g., waitstaff, bussers, and maitre d’s)
If a lower percentage rate was granted, write the rate in the space
working in the establishment when the agreement is adopted. The
provided and attach a copy of the IRS determination letter.
The 8% rate (or lower rate) is used for tip allocation purposes
1. Provide for an allocation of the difference between total tips
only. Using this rate does not mean that directly tipped
reported and 8% of gross receipts among employees who receive tips
employees must report only 8%. They should report the amount
that approximates the actual distribution of tip income among the
of actual tips received.
2. Be effective the first day of a payroll period that begins after the
If you have allocated tips using other than the calendar year, put
date the agreement is adopted, but no later than January 1 of the next
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
3. Be adopted when there are employees in each occupational
based on the time period for which wages were paid or allocated on a
category who would be affected by the agreement; and
4. Allow for revocation by a written agreement adopted by at least
two-thirds of the employees in occupational categories affected by the
Line 7 — Allocation of tips. If 8% (or an approved lower rate) of
agreement when it is revoked. The revocation is effective only at the
gross receipts (line 6) is more than the amount of tips reported by your
beginning of a payroll period.
employees (line 4c), you must allocate the excess to those employees.
Line 8 — Total number of directly tipped employees. Enter the total
Enter the excess on line 7. There are three methods by which you may
number of directly tipped employees who worked at the establishment
allocate tips. Mark the checkbox on line 7a, b, or c to show the method
during 2001. This is the cumulative total of all directly tipped employees
who worked at the establishment at any time during the year. If you
Line 7a — Hours-worked method. Establishments that employ fewer
have a large turnover of directly tipped employees, this number may be
than the equivalent of 25 full-time employees (both tipped and
large. Do not use this number to determine if you must file
nontipped employees) during a payroll period may use the
Form 8027. Instead, see the Worksheet for Determining Whether To
hours-worked method to allocate tips. You will be considered to have
File Form 8027, on page 1.
employed fewer than the equivalent of 25 full-time employees during a
payroll period if the average number of employee hours worked (both
Example for Line 7b — Gross receipts method. A large food or
tipped and nontipped employees) per business day during a payroll
beverage establishment has gross receipts for a payroll period of
period is less than 200 hours.
$100,000 and has tips reported for the payroll period of $6,200. Directly