November 26, 2018
If you operate a large food or beverage establishment, you must report allocated tips under certain circumstances. A large food or beverage establishment is a food or beverage operation where tipping by customers is customary and, on a typical business day during the preceding calendar year, the employer normally employed more than 10 employees.
In general, you must allocate tips among employees who receive them if the total tips reported to you during any payroll period, or annually, are less than 8% of the establishment’s gross receipts for that period. The allocation is made to each directly tipped employee performing services for the establishment who has a reporting shortfall for that period. Generally, the amount allocated is the difference between the total tips reported by employees and 8% of gross receipts.
Allocated tips are reported in Box 8 of the W-2 and are not included in Box 1, 3, 5 or 7. The allocated tips are not subject to income, Social Security or Medicare taxes. In addition to reporting allocated tips on the W-2, Form 8027 (Employer’s Annual Information Return of Tip Income and Allocated Tips) must be completed and sent to the IRS by Feb. 28, 2019.
Instructions for completing Form 8027 can be found at https://www.irs.gov/pub/irs-pdf/i8027.pdf.