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

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

Lines 1 Through 8

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

Credit card sales. If the credit or debit charge receipts reflect tips, then

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

you must enter on lines 1 and 2 the appropriate amounts shown on the

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

credit card or debit card charge statements. See instructions for line 1

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

below.

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

Rounding off to whole dollars. You may round off cents to whole

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

dollars on your return and schedules. If you do round to whole dollars,

employed.

you must round all amounts. To round, drop amounts under 50 cents

and increase amounts from 50 to 99 cents to the next dollar. For

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

example, $1.39 becomes $1 and $2.50 becomes $3.

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

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

If you have to add two or more amounts to figure the amount to

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

enter on a line, include cents when adding the amounts and round off

(see example below):

only the total.

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

Line 1 — Total charged tips for calendar year 2004. 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.

rate.

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

reported.

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

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

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

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

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

for the payroll period.

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

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.

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

In figuring the tips you should report for 2004, do not include tips

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

received by employees in December 2003, but not reported until

January 2004. However, include tips received by employees in

the amount that has to be allocated among the directly tipped

CAUTION

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

December 2004, but not reported until January 2005.

step 4.

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

tipped employee.

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

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

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

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

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

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

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

employees who receive tips (for example, waitstaff, bussers, and maitre

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

d’s) working in the establishment when the agreement is adopted. The

provided and attach a copy of the IRS determination letter.

agreement must:

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

CAUTION

of actual tips received.

employees;

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

TIP

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

year;

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

quarterly basis.

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

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

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

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

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

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

beginning of a payroll period.

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

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

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

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

number of directly tipped employees who worked at the establishment

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

during 2004. This is the cumulative total of all directly tipped employees

nontipped employees) during a payroll period may use the

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

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

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

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

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

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

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

tipped and nontipped employees) per business day during a payroll

File Form 8027 on page 1.

period is less than 200 hours.

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

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

beverage establishment has gross receipts for a payroll period of

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

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

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

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

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

reported $500.

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

-3-

Instructions For Form 8027 Page 3

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