IRS Tip Reporting Audits

Food & Beverage Association Members and Associates,

Through the years the F&BA has hosted IRS workshops on Tip Reporting with great success---but with a changing economy, new businesses and ever changing personnel getting tip reporting right is a challenge.

We are aware the San Diego office of the IRS has 10 auditors whose job is to look at every Restaurant and Bar in the County for Tip Reporting errors. They started this year and will continue from A to Z.

Employee declaration of tips earned and the incorrect notion only 8% needs to be reported originating with the 8027Form, continue to be problem areas auditors hone in on with success.

More businesses are Tip Pooling or adding service charges for large parties or including a tip to all sales---all these practices are legal if done correctly---know the law to insure compliance.

See the tip reporting information below from the IRS to answer question you may have or use your membership to call the F&BA---619-228-2291

The F&BA mission is to help keep your business operating Safely, Legally and Profitably!

Have a Great One!

Stephen A Zolezzi

Executive VP, CEO

Food & Beverage Association San Diego County

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IRS Reporting Tip Income - Restaurant Tax Tips

Tips your employees receive from customers are generally subject to withholding. Employees are required to claim all tip income received. This includes tips you paid over to the employee for charge customers and tips the employee received directly from customers.

Employee Requirements

Employees must report tip income on Form 4070, Employee's Report of Tips to Employer, (PDF) or on a similar statement. This report is due on the 10th day of the month after the month the tips are received. This statement must be signed by the employee and must show the following:

The employee's name, address, and SSN.

Your name and address.

The month or period the report covers.

The total tips received.

No report is required from an employee for months when tips are less than $20.

Both Forms 4070 and 4070-A, Employee's Daily Record of Tips, (PDF) are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer. (PDF)

Employer Requirements

Employers must collect income tax, employee social security tax and employee Medicare tax on tips reported by employees. You can collect these taxes from an employee's wages or from other funds he or she makes available.

Allocation of Tips

As an employer, you must ensure that the total tip income reported to you during any pay period is, at a minimum, equal to 8% of your total receipts for that period.

In calculating 8% of total receipts, you do not include nonallocable receipts. Nonallocable receipts are defined as receipts for carry out sales and receipts with a service charge added of 10% or more.

When the total reported to you is less than 8%, you must allocate the difference between the actual tip income reported and 8% of gross receipts. There are three methods for allocating tip income:

Gross Receipt Method

Hours Worked Method

Good Faith Agreement

Employers can request a lower rate (but not lower than 2%) for tip allocation purposes by submitting an application to the IRS. Detailed instructions for computing allocation of tips, reporting allocated tips to employees, and for requesting a lower rate can be found in the Instructions for Form 8027. (PDF)

Note: The amount shown as allocated tip income is for information purposes only. You are not required to withhold Income or Social Security taxes on the allocated tip income. The amount of tip income allocated to each employee is shown in box 8 of their Form W-2.

Tip Reporting Requirements for Employers

Employers who operate large food or beverage establishments must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips (PDF) to report employee tip income. A large food or beverage establishment is defined as business where all of the following apply:

Food or beverage is provided for consumption on the premises

Tipping is a customary practice

More than 10 employees, who work more than 80 hours, were normally employed on a typical business day during the preceding calendar year.

A worksheet for determining whether a business meets the criteria listed above is included in the Instructions for Form 8027. (PDF)

References/Related Topics

Tax Tips - Restaurant

Rate the Small Business and Self-Employed Web Site

Page Last Reviewed or Updated: March 19, 2009