Instructions For Form 8027 (Page 3 of 4) in pdf

Lines 1 Through 8

Line 7b — Gross receipts method. If no good-faith agreement (as

explained below) applies to the payroll period, you must allocate the

Credit card sales. You must complete lines 1 and 2 to report tips and

difference between total tips reported and 8% of gross receipts using

sales (receipts) from credit cards and other credit arrangements.

the gross receipts method (or hours-worked method (line 7a)) as follows

(see example below):

Rounding off to whole dollars. You may round off your money entries

to the nearest dollar. To round off cents to the nearest whole dollar on

1. Multiply the establishment’s gross receipts (other than

your form, drop amounts under 50 cents and increase amounts from 50

nonallocable receipts) for the payroll period by 8% (.08) or the lower

to 99 cents to the next dollar. If you do round off, do so for all amounts.

rate.

But if you have to add two or more amounts to figure the amount to

2. Subtract from the amount figured in step 1 the total amount of

enter on a line, include cents when adding and only round the total.

tips reported by employees who were tipped indirectly for the payroll

period. This difference is the directly tipped employees’ total share of

Line 1 — Total charged tips for calendar year 2002. Enter the total

8% (or the lower rate) of the gross receipts of the establishment.

amount of tips that are shown on charge receipts for the year.

Indirectly tipped employees do not receive tips directly from customers.

Line 2 — Total charge receipts showing charged tips. Enter the

Examples are bussers, service bartenders, and cooks. Directly tipped

total sales (other than nonallocable receipts as defined on page 2) from

employees, such as waitstaff and bartenders, receive tips directly from

charge receipts that had a charged tip shown. Include credit card

customers. Employees, such as maitre d’s, who receive tips directly

charges and other credit arrangements and charges to a hotel room

from customers and indirectly through tip splitting or pooling, are treated

unless your normal accounting practice consistently excludes charges

as directly tipped employees.

to 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

reported.

step 2 by the following fraction: the numerator (top number) is the

Line 3 — Total amount of service charges of less than 10% paid

amount of the establishment’s gross receipts attributable to the

as wages to employees. Enter the total amount of service charges of

employee, and the denominator (bottom number) is the gross receipts

less than 10% that have been added to customers’ bills and have been

attributable to all directly tipped employees. The result is each directly

distributed to your employees for the year. In general, service charges

tipped employee’s share of 8% (or the lower rate) of the gross receipts

added to the bill are not tips since the customer does not have a choice.

for the payroll period.

These service charges are treated as wages and are includible on Form

4. From each directly tipped employee’s share of 8% or the lower

W-2. For details, see Revenue Ruling 69-28, 1969-1 C.B. 270.

rate of the gross receipts figured in step 3, subtract the tips the

employee reported for the payroll period. The result is each directly

Line 4a — Total tips reported by indirectly tipped employees.

tipped employee’s shortfall (if any) for the period.

Enter the total amount of tips reported for the year by indirectly tipped

5. From the amount figured in step 1, subtract the total tips

employees, such as cooks, bussers, and service bartenders.

reported by both directly and indirectly tipped employees. The result is

Line 4b — Total tips reported by directly tipped employees. Enter

the amount that has to be allocated among the directly tipped

the total amount of tips reported for the year by directly tipped

employees who had a shortfall for the payroll period as figured in

employees, such as bartenders and waitstaff.

step 4.

6. For each directly tipped employee who had a shortfall for the

In figuring the tips you should report for 2002, do not include tips

period as figured in step 4, multiply the amount in step 5 by the

received by employees in December 2001, but not reported until

following fraction: the numerator is the employee’s shortfall (figured in

January 2002. However, include tips received by employees in

CAUTION

step 4), and the denominator is the total shortfall of all directly tipped

December 2002, but not reported until January 2003.

employees. The result is the amount of allocated tips for each directly

Line 5 — Gross receipts from food or beverage operations. Enter

tipped employee.

the total gross receipts from the provision of food or beverages for this

establishment for the year.

Line 7c — Good-faith agreement. An allocation can be made under

If you do not charge separately for providing food or beverages

a good-faith agreement. This is a written agreement between you and

along with other goods or services (such as a package deal for food

at least two-thirds of the employees of each occupational category of

and lodging), make a good-faith estimate of the gross receipts from the

employees who receive tips (e.g., waitstaff, bussers, and maitre d’s)

food or beverages. This estimate must reflect the cost to the employer

working in the establishment when the agreement is adopted. The

for providing the food or beverage plus a reasonable profit factor.

agreement must:

Line 6. Enter the result of multiplying line 5 by 8% (.08) or a lower rate

1. Provide for an allocation of the difference between total tips

reported and 8% of gross receipts among employees who receive tips

(if the establishment was granted a lower rate by the IRS).

that approximates the actual distribution of tip income among the

If a lower percentage rate was granted, write the rate in the space

employees;

provided and attach a copy of the IRS determination letter.

2. Be effective the first day of a payroll period that begins after the

The 8% rate (or lower rate) is used for tip allocation purposes

date the agreement is adopted, but no later than January 1 of the next

only. Using this rate does not mean that directly tipped

year;

employees must report only 8%. They should report the amount

3. Be adopted when there are employees in each occupational

CAUTION

of actual tips received.

category who would be affected by the agreement; and

4. Allow for revocation by a written agreement adopted by at least

If you have allocated tips using other than the calendar year, put

two-thirds of the employees in occupational categories affected by the

TIP

an “X” on line 6 and enter the amount of allocated tips (if any)

agreement when it is revoked. The revocation is effective only at the

from your records on line 7. This may occur if you allocated tips

beginning of a payroll period.

based on the time period for which wages were paid or allocated on a

quarterly basis.

Line 8 — Total number of directly tipped employees. Enter the total

number of directly tipped employees who worked at the establishment

Line 7 — Allocation of tips. If the amount shown on line 6 is more

during 2002. This is the cumulative total of all directly tipped employees

than the amount of tips reported by your employees on line 4c, you

who worked at the establishment at any time during the year. If you

must allocate the excess to those employees. Enter the excess on line

have a large turnover of directly tipped employees, this number may be

7. There are three methods by which you may allocate tips. Check the

large. Do not use this number to determine if you must file

box on line 7a, b, or c to show the method used.

Form 8027. Instead, see the Worksheet for Determining Whether To

Line 7a — Hours-worked method. Establishments that employ fewer

File Form 8027, on page 1.

than the equivalent of 25 full-time employees (both tipped and

Example for Line 7b — Gross receipts method. A large food or

nontipped employees) during a payroll period may use the

beverage establishment has gross receipts for a payroll period of

hours-worked method to allocate tips. You will be considered to have

$100,000 and has tips reported for the payroll period of $6,200. Directly

employed fewer than the equivalent of 25 full-time employees during a

tipped employees reported $5,700, while indirectly tipped employees

payroll period if the average number of employee hours worked (both

reported $500.

tipped and nontipped employees) per business day during a payroll

period is less than 200 hours.

Directly tipped Gross receipts for

To allocate tips by the hours-worked method, follow the steps for the

employees

payroll period

Tips reported

gross receipts method below. However, for the fraction in step 3 of the

gross receipts method, substitute in the numerator (top number) the

$18,000

$1,080

number of hours worked by each employee who is tipped directly, and

16,000

880

in the denominator (bottom number) the total number of hours worked

by all employees who are directly tipped for the payroll period. See

23,000

1,810

Regulations sections 31.6053-3(j)(19) and 31.6053-3(f)(1)(iv) for details.

17,000

800

If you use the hours-worked method, be sure to enter in line 7a the

12,000

450

average number of employee (both tipped and nontipped) hours worked

per business day during the payroll period. If the establishment has

14,000

680

more than one payroll period, you must use the payroll period in which

$100,000

$5,700

the greatest number of workers (both tipped and nontipped) were

employed.

-3-

Instructions For Form 8027 Page 3

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