Lines 1 Through 8

Credit card sales.   You must complete lines 1 and 2 to report tips and sales (receipts) from credit cards and other credit arrangements.

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 your form, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. If you do round off, do so for all amounts. But if you have to add two or more amounts to figure the amount to enter on a line, include cents when adding and only round the total.

Line 1 - Total charged tips for calendar year 2002.   Enter the total amount of tips that are shown on charge receipts for the year.

Line 2 - Total charge receipts showing charged tips.   Enter the total sales (other than nonallocable receipts as defined on page 2) from charge receipts that had a charged tip shown. Include credit card charges and other credit arrangements and charges to a hotel room unless your normal accounting practice consistently excludes charges to a hotel room. Do not include any state or local taxes in the amounts reported.

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 than 10% that have been added to customers' bills and have been 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. These service charges are treated as wages and are includible on Form W-2. For details, see Revenue Ruling 69-28, 1969-1 C.B. 270.

Line 4a - Total tips reported by indirectly tipped employees.   Enter the total amount of tips reported for the year by indirectly tipped employees, such as cooks, bussers, and service bartenders.

Line 4b - Total tips reported by directly tipped employees.   Enter the total amount of tips reported for the year by directly tipped employees, such as bartenders and waitstaff.

In figuring the tips you should report for 2002, do not include tips received by employees in December 2001, but not reported until January 2002. However, include tips received by employees in December 2002, but not reported until January 2003.

Line 5 - Gross receipts from food or beverage operations.   Enter the total gross receipts from the provision of food or beverages for this establishment for the year.

If you do not charge separately for providing food or beverages along with other goods or services (such as a package deal for food 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 for providing the food or beverage plus a reasonable profit factor.

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 received.

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 basis.

Line 7 - Allocation of tips.   If the amount shown on line 6 is more than the amount of tips reported by your employees on line 4c, you must allocate the excess to those employees. Enter the excess on line 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 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 employees) per business day during a payroll period is less than 200 hours.

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

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 than one payroll period, you must use the payroll period in which the greatest number of workers (both tipped and nontipped) were employed.

Line 7b - Gross receipts method.   If no good-faith agreement (as explained below) applies to the payroll period, you must allocate the difference between total tips reported and 8% of gross receipts using the gross receipts method (or hours-worked method (line 7a)) as follows (see example below):

1. Multiply the establishment's gross receipts (other than nonallocable receipts) for the payroll period by 8% (.08) or the lower rate.
2. Subtract from the amount figured in step 1 the total amount of tips reported by employees who were tipped indirectly for the payroll period. This difference is the directly tipped employees' total share of 8% (or the lower rate) of the gross receipts of the establishment. Indirectly tipped employees do not receive tips directly from customers. Examples are bussers, service bartenders, and cooks. Directly tipped employees, such as waitstaff and bartenders, receive tips directly from customers. Employees, such as maitre d's, who receive tips directly from customers and indirectly through tip splitting or pooling, are treated as directly tipped employees.
3. For each employee who is tipped directly, multiply the result in step 2 by the following fraction: the numerator (top number) is the amount of the establishment's gross receipts attributable to the employee, and the denominator (bottom number) is the gross receipts attributable to all directly tipped employees. The result is each directly tipped employee's share of 8% (or the lower rate) of the gross receipts for the payroll period.
4. From each directly tipped employee's share of 8% or the lower 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 employee's shortfall (if any) for the period.
5. From the amount figured in step 1, subtract the total tips reported by both directly and indirectly tipped employees. The result is the amount that has to be allocated among the directly tipped employees who had a shortfall for the payroll period as figured in step 4.
6. For each directly tipped employee who had a shortfall for the period as figured in step 4, multiply the amount in step 5 by the following fraction: the numerator is the employee's shortfall (figured in step 4), and the denominator is the total shortfall of all directly tipped employees. The result is the amount of allocated tips for each directly tipped employee.

Line 7c - Good-faith agreement.   An allocation can be made under a good-faith agreement. This is a written agreement between you and at least two-thirds of the employees of each occupational category of employees who receive tips (e.g., waitstaff, bussers, and maitre d's) working in the establishment when the agreement is adopted. The agreement must:

1. Provide for an allocation of the difference between total tips reported and 8% of gross receipts among employees who receive tips that approximates the actual distribution of tip income among the employees;
2. Be effective the first day of a payroll period that begins after the date the agreement is adopted, but no later than January 1 of the next year;
3. Be adopted when there are employees in each occupational 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 agreement when it is revoked. The revocation is effective only at the beginning of a payroll period.

Line 8 - Total number of directly tipped employees.   Enter the total number of directly tipped employees who worked at the establishment during 2002. This is the cumulative total of all directly tipped employees who worked at the establishment at any time during the year. If you have a large turnover of directly tipped employees, this number may be large. Do not use this number to determine if you must file Form 8027. Instead, see the Worksheet for Determining Whether To File Form 8027, on page 1.

Example for Line 7b - Gross receipts method.   A large food or beverage establishment has gross receipts for a payroll period of $100,000 and has tips reported for the payroll period of $6,200. Directly tipped employees reported $5,700, while indirectly tipped employees reported $500.

	Directly tipped employees	Gross receipts for payroll period	Tips reported
	A	$18,000	$1,080
	B	16,000	880
	C	23,000	1,810
	D	17,000	800
	E	12,000	450
	F	14,000	680
	$100,000		$5,700
1.	$100,000 (gross receipts) X .08 = $8,000
2.	$8,000 - $500 (tips reported by indirectly tipped employees) = $7,500
3.	Directly tipped employees	Directly tipped employee's share of 8% of the gross	(Times) Gross receipts ratio	Employee's share of 8% of gross
	A	$7,500 x	18,000/100,000 =	$1,350
	B	$7,500 x	16,000/100,000 =	1,200
	C	$7,500 x	23,000/100,000 =	1,725
	D	$7,500 x	17,000/100,000 =	1,275
	E	$7,500 x	12,000/100,000 =	900
	F	$7,500 x	14,000/100,000 =	1,050
				$7,500
4.	Directly tipped employees	Employee's share of 8% of the gross	(Minus) Tips Reported	Employee shortfall
	A	$1,350 -	$1,080 =	$270
	B	1,200 -	880 =	320
	C	1,725 -	1,810 =	-
	D	1,275 -	800 =	475
	E	900 -	450 =	450
	F	1,050 -	680=	370
	Total shortfall			$1,885
5.	$8,000 less $6,200 (total tips reported) = $1,800 (amount allocable among employees who had a shortfall)
6.	Shortfall employees	Allocable amount	(Times) Shortfall ratio	Amount of allocation
	A	$1,800 x	270/1,885 =	$258
	B	1,800 x	320/1,885 =	306
	D	1,800 x	475/1,885 =	454
	E	1,800 x	450/1,885 =	430
	F	1,800 x	370/1,885 =	353

Because employee C has no shortfall, C gets no allocation.

In this example, the total amount of allocation is $1,801 resulting from the rounding off to whole numbers.

Employer's Optional Worksheet for Tipped Employees

Unreported tip income can lead to additional employer liability for FICA taxes. As a means of determining if your employees are reporting all of their tips to you, please take a few minutes to voluntarily complete the following worksheet. Completing this worksheet is only for the employer's information (it is not sent to the IRS).

1.	Enter amount from Form 8027, line 1	1.
2.	Enter amount from Form 8027, line 2	2.
3.	Divide line 1 by line 2, enter as a decimal (at least 4 decimal places)			3.
4.	Enter amount from Form 8027, line 4c	4.
5.	Enter amount from Form 8027, line 5	5.
6.	Divide line 4 by line 5, enter as a decimal (at least 4 decimal places)			6.
7.	Subtract line 6 from line 3; if zero or less, stop here			7.
8.	Potential unreported tips. Multiply line 7 by line 5			8.

Once you have completed the worksheet:  

• If the entry on line 7 is zero or less, your employees are probably accurately reporting their tips; however,
• If the entry on line 8 is greater than zero, depending on the type of operation you have and whether or not you have allocated tips, it is possible that your employees are not reporting all of their tip income to you.

Another quick method to determine if your employees are properly reporting all of their tips to you is to compare the rate of tips reported on credit sales to the rate of tips reported on cash sales. For example, if line 3 in the worksheet above greatly exceeds the rate determined from dividing reported cash tips by reportable cash receipts (i.e., total cash receipts less nonallocable cash receipts), some of your employees may not be reporting all of their tips to you and you generally should be showing an amount on line 7 (Allocation of tips) of Form 8027.

Need Help?

If it appears that not all tips are being reported to you, the IRS offers a service called the Tip Rate Determination & Education Program. This program can assist you, the employer, in implementing more effective methods of tip income reporting. The program also offers assistance in educating tipped employees concerning their obligations relating to the reporting of any tip income they receive. To find out more about this program or to identify the IRS Tip Coordinator for your state, call 1-800-829-1040 or visit the IRS Web Site at www.irs.gov and search for Voluntary Compliance Agreements.

Privacy Act and Paperwork Reduction Act Notice.

We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax.

Chapter 61, Information and Returns, of Subtitle F, Procedure and Administration, requires certain employers to report gross receipts, tips reported to them, and any allocated tips; and to furnish the amount of any allocated tips to affected employees. Section 6053 and its related regulations provide the definitions and methodology to be used in completing these forms. If you fail to provide this information in a timely manner you may be liable for penalties as provided by section 6721.

You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law.

Generally, tax returns and return information are confidential, as required by section 6103. However, section 6103 allows or requires the Internal Revenue Service to disclose or give the information shown on your tax return to others as described in the Code. For example, we may disclose your tax information to the Department of Justice for civil and criminal litigation, and to cities, states, and the District of Columbia for use in administering their tax laws. We may also disclose this information to Federal and state agencies to enforce Federal nontax criminal laws and to combat terrorism.

The time needed to complete and file these forms will vary depending on individual circumstances. The estimated average times are:

Forms	8027	8027-T
Recordkeeping	9 hr., 47 min.	43 min.
Learning about the law or the form	53 min.
Preparing and sending the form to the IRS	1 hr.	4 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making these forms simpler, we would be happy to hear from you. You can write to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001. Do not send the tax forms to this address. Instead, see Where To File on page 1.

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