Outline Transcript Links Bios

Evette Davis: Welcome to today's webinar, Form 8027 and Large Food and Beverage Establishments.

We're so glad you're joining us today.

My name is Evette Davis and I am a Senior Stakeholder Liaison with the Internal Revenue Service, and I will be your moderator for today's webinar.

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Again, welcome and thank you for joining us for today's webinar.

Before we move along with our session, let me make sure you're in the right place.

Today's webinar is "Form 8027 and Large Food and Beverage Establishments." This webinar is scheduled for approximately 120 minutes.

Now let me introduce today's rock stars, our speakers Jennifer Cunningham and Walter Budzinski, our senior program analysts, and Leann Danner is a Territory Tip Coordinator for the National Tip Reporting Compliance Program, known as NTRCP.

Okay, Jennifer, let's begin our presentation with you.

Are you there?

Jennifer Cunningham: Yes. Thank you, Evette.

The Form 8027, Employer's Annual Information Report of Tip Income and Allocated Tips is an information return that is required by law to be filed annually by certain large food and beverage establishments.

There seems to be a lot of questions on if you're required to file or how to prepare this form.

So our objectives today are to define large food and beverage establishment operations and discuss the general filing and preparation requirements of this form.

Now, while tip agreements are beyond the scope of this webinar, we will also discuss briefly the unique Form 8027 reporting requirements for employers under a tip agreement.

And finally, we will share some of the common errors we see on the Form 8027, as well as provide some guidance to help in preparing the form.

Overall, our goal is to improve the accuracy of the Form 8027 and to ensure the return is timely filed to avoid penalties.

Now, when preparing the Form 8027 do you find that you have lots of questions?

Ones that are as simple as, "Do I really need to file this form?" And, "If I need to file, what should I include on this line, or what should I exclude on another line?" Or one that we often hear, "How do I allocate tip?

What does this even mean?" Well, you're not alone -- that's why we developed this webinar to help answer some of those questions.

Now, as previously mentioned, the Form 8027 is often confusing, and that results in many forms being filed inaccurately or not at all.

The service must often reach out to taxpayers to resolve potential discrepancies, and these calls and letters create additional work for both the IRS and for you, the employers.

So during this presentation, we will provide an overview of the various components of the Form 8027 so that you can better understand how to prepare it and its filing requirements.

So, Walter, do you want to begin our discussion today on what qualifies as a large food and beverage establishment?

Walter Budzinski: Why, yes, I would -- thank you, Jennifer.

So let's start with the basics.

What is a food and beverage operation?

Well, it's any business activity which provides food or beverages for consumption on the premises.

Seems simple, but there are a few exceptions, such as fast food operation.

A fast food operation is one that customers order, pick up and pay for food or beverages at a counter or window, then carry to another location on or off the premises.

Another exception is for establishments that are delivery or takeout only.

Form 8027 is not required to be filed by either fast food or delivery/takeout only establishments.

However, the other tip laws continue to apply.

For instance, tips received are taxable if any tipped employee receives more than $20 per month in tip, the employee must report the tips to the employer by the 10th day of the following month in which the tips are received.

Food and beverage operations can be viewed as separate venues, doors, rooms outlets, establishments or cost centers.

A separate Form 8027 is fired for each separate operation with its own cost center.

A cost center exists when the income and expenses are tracked separately for that activity.

When an establishment has multiple locations, each location is considered a separate activity.

Each location must have its own Form 8027 filed.

There are no consolidated forms with the 8027.

An employer with a single building with multiple activities must file separately for each activity that records gross receipts separately.

If two different operations are in the same space and have separate cost centers, then two Form 8027s are required.

For instance, you might have a deli during the daytime and then operate it as a regular restaurant by night.

If you have a single building, such as a casino or hotel, multiple food and beverage outlets within the same building are each required to have their own Form 8027.

For instance, a casino with a steak house, a buffet, and a barista bar would potentially have three Form 8027 filing requirements.

Another requirement for filing the Form 8027 is the customary tipping of food and beverage employees.

A full service restaurant is a place where tipping is customary by customers, but a limited service bagel shop establishment may not be.

Employees of these establishments may sometimes get tips, but generally tipping isn't customary for that type of operation.

Form 8027 is only required to be filed if the operation customarily receives tips, so please check out the 8027 instructions or go to the Treasury Regulations, Section 31.6053-3(j)(7) or (18)

for more information.

Now that we have identified food and beverage operations, we take it to the next level.

What makes the operations large?

Remember, the Form 8027 is required for all large food and beverage operations.

There's a 10 employee test to determine if the operations are considered large and must file the Form 8027.

The 8027 instructions have a worksheet for your convenience.

It is a calculation that takes employee hours worked and days open during the highest and lowest gross receipt month to determine if the 10 employee test is met by using an average of 80 hours.

It sounds complicated, but the worksheet will walk you through it.

Another confusing area is determining which employees to include.

To determine whether a business is a large food and beverage operation.

All employees of the food or beverage operations are included, even if an individual operation has fewer than 10 employees.

Let me repeat, the determination requires that the taxpayer consider all their food and beverage operations, even if one would not qualify as a standalone.

The employee test also requires counting tipped and non-tipped employees, so managers, home cooks, waiters, bartenders, everyone is included except the 50 percent or more owner or fast food operations.

Do not apply the 10 employee test separately to each food or beverage operation.

Operations file separate Form 8027 but combine employees to determine whether as considered a large food and beverage establishment, so please refer to the instructions for Form 8027 or the Treasury Regulations under Section 6053 for any additional information.

So let's go through an example.

Rose Casino has the following separately located food and beverage operations.

They have a fine dining with 20 tipped employees and seven non-tipped employees; a cafe with five tipped employees and three non-tipped employees; a bar with 20 tipped employees and five non-tipped employees; and a dinner showroom with 50 tipped employees and ten non-tipped employees.

Since Rose Casino has four food and beverage operations or activities, the 10 employee test would combine the hours worked for all four together.

Based on this example, it would include all employees at the food or beverage, beverage operations of Rose Casino.

These include all tipped and non-tipped employees.

There are a total of 120 employees broken down there are 27 for the fine dining, eight for the cafe, 25 for the bar, and 60 for the dinner showroom.

The non-tipped employees would be positioned like managers, cooks, dishwashers, et cetera.

Rose should not exclude the cafe with eight employees because the test requires all operations and their employees to be combined.

So, Evette, do we have time for a polling question?

Evette Davis: Of course we do, Walter!

Thank you so very much for that great, great information.

Okay. So our first polling question is: the employer has one location but has two separate activities: a breakfast-and-lunch buffet, and a full service restaurant at night.

The employer is unsure if the employee test is met.

How are employees counted?

Is it, A, Employees are counted separately for each activity.

B, Employees are combined without regard to each activity.

C, The employee is counted in the activity for which they have the most hours, or, D, Employees are not counted but employee hours are used.

Think about what we just heard Walter talk about.

Please take a moment.

Let's look at the question again and then click the radio button you believe most closely answers this question, and I'll give you just a few more seconds to make your selection.

Okay? The employee has one location, but two separate activities: breakfast-and-lunch buffet, and full service restaurant at night.

They're unsure if the ten-employee test is met.

How are employees counted?

Okay, so we're going to close the polling in five, four, three, two, one.

Let's close the polling now and share the correct answer on the next slide.

And the correct answer is "D," employees are not counted, but employee hours are used.

Let's see what percentage of you responded correctly.

Okay. All right, looks like we have a percentage of 72 percent that responded correctly, Walter.

So I think they might have missed something in your explanation -- can you kind of explain to us why "D" is the correct answer?

Walter Budzinski: Sure, Evette.

You know, this test is tricky and it is called the 10 employee test.

However, really, when you look at the worksheet, it's the hours worked, and that is the 80 hours.

And so I know that in our answers that we gave you, you know, we gave you three answers with that head employees and then one that was about the hours worked.

But you really do want to look at that worksheet that's in the instructions, and it will go ahead and tell you with the hours worked and how you can enter that information and do the calculations.

So it's really based on that rather than the number of employees.

It's on the number of hours worked.

Evette Davis: Thank you, Walter, and I'm so glad that the folks on the line are here because we are learning some great information and this is going to be very, very helpful to them, I am sure.

Okay, thanks Walter. Leann!

And would you like to tell us about the filing requirements for the Form 8027?

Leann Danner: Thank you, Evette. Yes, I would.

Here's the top of the Form 8027.

You can find this form at www.IRS.gov under "Forms and instructions." Let's take a look at this.

Well, as you can see, there are more sections to complete than just the name and the EIN.

We will address each of these lines during our discussion today on preparing the return.

Now, let's turn to the format used to file Form 8027.

As discussed, employers must file Form 8027 for each food and beverage establishment or activity.

Use Form 8027-T, the transmittal of employer's annual information return of tip income and allocated tips.

If you are filing multiple forms 8027, remember, paper forms must be mailed to the address listed in the instructions by February 28th.

Here's a copy of the top of Form 8027-T.

Remember, this is used for employers who file multiple forms 8027.

Employers who electronically file have until March 31st to file the Form 8027 with the IRS.

You will go to IRS.gov/FIRE or use Publication 1239, "Specifications for filing electronically a Form 8027, employer's annual information return of tip income and allocated tips," for more information.

If you are filing 250 or more Form 8027s, you are required to file electronically.

Okay, employers on a GITCA or TRDA submit Form 8027 electronically to a different address -- they will submit it to SBSE.Tip.compliance@IRS.GOV on or before March 31.

And just to remind you, around the first of each year, you will receive a gentle reminder from our very own Walter Budzinski notifying you that your reports are soon to be due.

This reminder normally includes all the forms that potentially need to be submitted.

Remember, March 31st is the due date for electronically filing these return forms.

Paper returns are due one month earlier on February 28.

Forms filed after those date may be subject to penalties.

If you are in a tip agreement, listen up.

This is for you.

Employers in a tip agreement may have year-end filing requirements, which includes submitting Form 8027 with respect to large food and beverage establishments.

If your operation does not meet the requirement to file Form 8027 with respect to a large food and beverage establishment, the employer should inform the IRS in writing when submitting year-end reports, and include the reason the operation does not meet the requirement.

For example, the establishment is a fast food operation.

Failure to submit this information can put the tip agreement at risk for revocation.

If the employer does meet the requirements to file Form 8027, the same rules that Walter previously discussed still apply, including the 10 employee test for all operations under one entity.

Okay, now that we discussed some of the general filing requirement for the Form 8027, let's look at some points to consider when preparing this form.

I've got a great tax tip for you.

Although Form 8027 is not required to be filed in the paper format until February 28th or electronically until March 31st, we recommend that you "prepare" it at least in draft prior to issuing your W-2s.

Why?

You might be saying, "I've got a lot of stuff to do at year-end, why would I want to look at this form when it's not due till later?" Well, Form 8027, prepared correctly, will determine if an allocation of tips is required.

Allocated tips must be included in Box 8 on form W-2 of certain tipped employees.

If W-2s are prepared and issued without determining the allocated tip amount, W-2Cs will need to be prepared for all affected employees.

That just sounds like more work to me.

So if you're already reviewing your financial and payroll records at year-end close, wouldn't it make sense, to avoid unnecessary reporting errors, to review your Form 8027 at the same time?

Preparing Form 8027 will assist with your allocation of tips determination.

And an allocation of tips is included on the form W-2 issued to employees who report tips of less than 8% of their sales.

Sort of sounds like some good tax planning to me.

But we'll leave that up to you.

So just to reiterate, for employers, include tips in Box 8 on form W-2 for directly tipped employees who report tips less than 8% of their sales.

That's for all employers.

Those employers under a tip agreement only include allocated tips for non-participating tipped employees.

Participants in the tip compliance program do not get allocated tips on form W-2.

Also allocated tips are not included in tips reported on Form 14439 your employee year-end data report.

Remember this Form 14439 is only for employers under a tip agreement.

Okay, Evette, let's go to another polling question.

Evette Davis: You've got it, Leann, thank you so very much for sharing such great information.

Okay, so our second polling question is on the screen, and it states, which of the following statements are true when filing your Form 8027?

A, to file a separate Form 8027 for each food and beverage activity; B, Use Form 8027-T, transmittal of employer's annual information return of tipped income and allocated tips; C, Mail paper forms by February 28; D, Submit electronically by March 31; E, Employers under a tip agreement must submit Form 8027 to SBSE.Tip.Compliance@IRS.Gov on or before March 31st; or is it "F," all of the above?

Okay, so now Leann just gave us a lot of great information.

In this one, folks, we're going to go for 100% on this one, okay?

Take a moment, review the question again, and then click the radio button you believe most closely answers this question.

Think again about what Leann just talked to us about, which of the following statements are true when filing your Form 8027.

Okay, so we're going to give you just another moment or some seconds to make your selection.

All right, I'll start the countdown now.

At five, four, three, two, one.

Okay, let's stop the polling now and share the correct answer on the next slide.

And the correct answer is "F," all of the above.

All right, let's see what percentage of you responded correctly?

Come on, 100%!

Come on, we're waiting for the response rate.

And we are at -- okay, 94% Not too bad. I'll take that.

But we're going for a 100%, folks.

A great job.

All right, Leann, I think they heard you loud and clear.

Thank you so very much.

Jennifer, would you like to discuss how to prepare Form 8027 for us?

Jennifer Cunningham: Thank you, Evette. Yes, I would.

Okay, so let's start with the top portion of Form 8027.

First, the name of the establishment should be your doing business as, or your DBA.

What's the name your customers know or identify with the establishment?

It's on the front of your building or the name of the restaurant within a casino.

That's what you should enter on this line.

It's also very important that the employer identification number, or EIN, entered is the same as the number on your forms W-2 and the Form 941 used to report wages and taxes.

Remember an EIN is not the same as a Social Security number.

So make sure you have an EIN.

However, there's an exception to this rule -- if you're a certified professional employer organization, or CPEO, if that's you, please refer to the Form 8027 instructions for additional guidance on this issue.

The next area to address is a final or amended return.

Now, amended returns are used to correct a previous filing, so say you filed your Form 8027 and then realized that you had -- you left off some information.

So if you submit a corrected one, then that second one, you would you would select the "Amended return" box.

Now, a final return should only be checked when it's the last return ever to be filed by the business or for location.

This is applicable if it's the last year it will be in business or the last year it will be operating under this owner or EIN.

Also, make sure you check the type of establishment that best describes your business.

For example, if you're only open in the evenings, select "1," which is listed as evening meals only.

But if you operate a diner during the day and close at 2:00 p.m., then select number 3, which is meals other than evening meals.

However, number 4, alcohol only, should only be checked when you are a bar.

And that's when you serve alcohol primarily with limited food sales.

So "Alcohol only" should not be checked and is not applicable to a steak house that has both a dining and bar area.

Next, the employer's name and address, please make sure to enter the entity or individual name that matches the EIN.

This is the name and address provided when an EIN was requested from the IRS.

Now, let's talk about if you have multiple establishments.

If there are multiple establishments operating under the same EIN, a five-digit number must be assigned to identify the individual locations.

Give each establishment a separate number and complete a separate Form 8027 for each.

Now, the number that you assign, or that five-digit number for that location should be used year after year for that same establishment.

And finally, please check whether the establishment accepts electronic settlement methods, such as credit or debit cards.

Why is this important to know?

Because this will tell us that we should see charged tips reported on line 1 of the Form 8027.

So, Evette, let's go to another polling question.

Evette Davis: All right, Jennifer, you got it.

I just happened to have one right here.

Okay, so our third polling question is, If an establishment is a high end steakhouse with a dining and bar area with significant alcohol sales that is only open in the evening, what type of establishment bar should they check on Form 8027?

Okay, folks, they're trying to trick us here, so pay attention and remember what Jennifer just told us.

Is it "A," evening meals only; B, Evening and other meals; C, Meals other than evening meals; or D, Alcoholic beverages?

Again, take a take a moment to look at the question.

Look at the responses.

Think about what you just heard Jennifer say.

And then click the radio button you believe closely answers or accurately answers this question.

I'll give you just a few more seconds to look it over so that you can make your selection -- if an establishment, is a high end steakhouse with a dining and bar area, and they have significant alcohol sales, is open only in the evening, what type of establishment box should they check on the Form 8027?

Okay, just a few more seconds, and we're going to close the polling in five, four, three, two, one.

All right, folks, let's stop the polling now, and we'll share the correct answer on the next slide.

OK. And the correct answer is...

"A," Evening meals only.

All right, I'm excited to see how many of you actually responded correctly.

What is our percentage? I'm waiting for it.

We've got a drum roll here.

Waiting for a response.

Okay, it looks like we're at 54%.

Oh!

All right, folks. No worries.

That's why everybody's here.

We're learning. we're learning.

Jennifer, can you kind explain to everyone why the answer is "A," evening meals.

I knew this was going to be a tricky one.

Jennifer Cunningham: Okay, so I think I have some explaining to do, right?

Let's look at our options. Okay?

When determining which box to check, you will notice that three of your options are based on the hours of operation.

What hours is the establishment open?

And all of the options relate to the type of items offered on your menu.

So using those factors as a guide, let's start with evening and other meals.

This box would be applicable for establishments that are often -- that are open for breakfast and/or lunch, as well as dinner -- for example, a sports bar that opens at 11:30 in the morning and closes at midnight.

The next option we have are meals other than evening meals.

Again, these establishments would be open for breakfast and lunch, but not for dinner.

This would be an establishment that opens at 6:00 a.m.

to serve breakfast but closes at 3:00 p.m. each day.

And finally, we have alcoholic beverages.

This park should be checked when the establishment primarily serves drinks with limited food options.

So in our example, we have a steak house open in the evenings only; they're only open in evenings and they have both dining and bar areas.

So the obvious choice is "A," evening meals only.

Okay, Evette, I hope that helps clarify what box space they should select.

Evette Davis: Yes, yes, thank you so much, Jennifer, yeah, I knew this was going to be a tricky one, and I'm so glad you gave us that detailed explanation and I know the instructions for the Form 8027 is going to be a great help to everyone as well.

Thanks again. So, Walter, I'm going tap-tap-tap you again -- can you continue our discussion on preparing Form 8027 please?

Walter Budzinski: I sure can, Evette, Thank you very much.

So let's move to the Form 8027, lines 1 through 7.

And we're going to go ahead and walk through each line.

So let's begin with line 1, total charge tips for the calendar year.

This line should only include charge tips added by the customer to the credit, debit, or other electronic payment method.

There is an exception, though -- processing fees, auto gratuities, or service charges are additional charges on the bill imposed by the establishment, such as an 18% for parties of six or more.

The auto gratuities distributed to the employees are excluded from Line 1, total charge tips.

And why is that?

It's because per Revenue Ruling 2012-18 that went into effect January 1, 2014, auto gratuities are to be treated as wages, not tips -- and we're going to go ahead and discuss auto gratuities a little later on.

Line 2 is total charge receipts showing a charge tip.

And this is an area where we see some of the greatest errors.

This line should only include charge receipts that had a charged tip added to the bill.

So excluded from this line are charged sales without a charged tip, because customers may leave no tip or may decide to leave a cash tip and do not include this type of transaction line 2.

Then we have next non-allocable sales, which are sales where tipping isn't customary, such as a pick-up only deli shop.

Also excluded are sales with a service charge added of 10% or more and carry out sales.

And finally, taxes and tips are excluded.

So now I'm going to go ahead and kick it back to Leann, so would you like to continue our line by line discussion on preparing Form 8027?

Lean Danner: I sure would, Walter.

Let's look at Line 3.

Total amounts of service charges of less than 10% paid as wages to employees.

This line and this amount is based on an old revenue ruling, 69-28, that discusses the treatment of certain amounts paid to club employees.

This line is normally not applicable to most establishments because auto gratuities and service charges are normally 15 to 20 percent.

For example, think about banquet fees or large parties of six or more.

That's why this line is normally blank.

Now we'll move to the actual tips reported by both directly tipped and indirectly tipped employees -- lines 4A through 4C.

Line 4A, total tip reported by indirectly tipped employees, for example, bussers, runners.

food runners, apprentice bartenders, and other positions who receive tips from other tipped employees, not directly from customers.

This is commonly referred to as Tip Outs.

Under the law, the employee must keep track of the tips received from other employees, including their name, date, and amount received.

Line 4B should include total tips reported by directly tipped employees such as waitstaff or bartenders.

These employees receive tips directly from customers, that includes both charge and cash tips.

Directly tipped employees must also keep track of the amount they pay to other employees, including their name, date, and the amount tipped out.

So what if an employee receives tips directly from customers and indirectly from other employees, such as a maitre d' position?

Where should we include this?

You should include the tips as a directly tipped employee on line 4B.

So if you have a maitre d' position that receives tips directly from customers and indirectly from employees, include this amount on Line 4B as a directly tipped employee.

Okay, of course, line 4C is the total of line 4A plus 4B -- simple math, right?

However, we see a lot of Forms 8027 with zero on Line 4A.

This indicates that there are no indirectly tipped employees.

Remember, line 4C should reflect total tips reported for the year.

This includes tips reported by indirectly and directly tipped employees at this activity or location.

Okay, Evette, let's look at the next line.

Line 5 of Form 8027 is gross receipts for the activity, location, establishment or outlet.

On this line include all receipts from food and beverages.

This includes cash, charge receipts, and even the retail value of complimentary food or beverages served to customers if tipping is customary, such as complimentary drinks at a casino.

You should exclude tips, taxes and non-allocable sales.

In general, all sales on which tipping is not customary are considered non-allocable sales and should be excluded from Line 5.

This would include things like carryout and retail sales, to-go sales, logo T-shirts, glasses, and other merchandise.

So are you wondering if there's anything else to exclude?

Well, there is.

One more exclusion we should discuss.

Sales covered under Revenue Ruling 2012-18.

All sales where the establishment imposes an auto gratuity or service charge that is then distributed to the tipped employees should also be excluded from Line 5, such as a 20% gratuity for parties of six or more at a restaurant.

This slide captures the treatment of auto gratuity on Form 8027.

This is an area that is often misunderstood.

Per Revenue Ruling 2012-18, service charges imposed by the employer are the property of the employer until they are distributed to the employee.

When they are distributed to the employee, these moneys are considered wages, not tips.

Thus service charges or auto gratuities imposed by this establishment and distributed to the employees are wages, not tips, and the related sales should be excluded from gross receipts, line 5, and charge receipts, line 2.

These sales may include, but are not limited to, parties of six or more, bottle service, room service, delivery fees, banquet fees, private parties and catering.

So again, how does Revenue Ruling 2012-18 impact form 8027?

If service charges and gratuities are imposed by the employer and any portion of that is distributed to the employee, the amount must report it as wages on the employee's form W-2.

These moneys are not tips.

So for Form 8027 purposes, you must do the following: Exclude service charges and gratuities from charge tips on line one; exclude revenue associated with service charges and auto gratuities from gross receipts on line five and charge receipts on line two.

And finally, please notify your payroll department that such gratuities are to be treated as wages on the employee paycheck, not as tips.

For additional guidance on what revenue to exclude from Line 5, please refer to the instructions for Form 8027.

Line six determines the allocation of tips for the establishment as a whole.

Allocation of tips is required when the aggregate of tipped employees report tips below 8% of tipped sales.

The gross receipts reported on line 5 are multiplied by 8%.

If the gross receipts multiplied by 8%, or line six, is greater than total tips reported by all employees, which is line 4C, the establishment must allocate tips.

There are situations when an establishment has an overall lower tip rate than 8%.

If this situation applies, taxpayers can apply for a lower percentage by submitting supporting documentation.

We will discuss the application process later in this presentation.

However, if a lower percentage is approved by the IRS, the taxpayer should enter this approved lower percentage in the area noted on Form 8027 and use this lower percentage to calculate the amount for line six.

Taxpayers must also attach the approved determination letter to the Form 8027 when submitting.

Finally, we've reached the seventh line stretch, or the red zone for you football fans.

We're almost finished with our line by line discussion.

The amount computed and shown on line seven must be allocated to directly tipped employees who have a shortfall.

A shortfall is reporting tips less than 8% of sales.

There are three methods used to allocate tips: hours worked, gross receipts, and a good faith agreement.

To determine which method is applicable to an establishment, please refer to the criteria outlined in Form 8027 instruction as well as Treasury regulation 31.6053-3(f)(2).

And finally, line 8 -- this is simply used to report the number of directly tipped employees who worked at the establishment during the calendar year.

This should be the cumulative total of all directly tipped employees who worked for you any time during the calendar year.

So if you have a lot of staffing turnover, this number could be large.

So, Jennifer, would you like to talk about what to do if your business consistently makes less than 8% of sales in tips?

Jennifer Cunningham: Yes, Leann, thank you.

Okay, so even though we've reviewed the data required on Form 8027 line by line, I'd like to make a couple of other points about allocated tips.

This is another area that's often very confusing, so let's start with the percentage to apply on line six of Form 8027.

The allocation rate that is required for all Form 8027 filers is 8% unless you have requested and been granted approval from the IRS to use a lower rate.

Form 8027 instructions have really good guidance on requesting a lower tip rate.

Now, if you operate an establishment whose employees consistently receive less than 8% of sales, a lower rate may be requested by submitting a petition to the IRS.

However, you cannot request a rate less than 2%two percent.

When you make the request to apply a lower rate at an establishment, you must provide sufficient information for us to make a determination.

And that includes the Form 8027s for the three preceding calendar years, if filed; a detailed description of the outlets, such as the type of restaurant, hours open, type of customers, and even if alcohol is served.

And finally, remember to include the user fee, attach the Form 8027, and a current menu, and sign the petition under penalties of perjury when you submit it.

Now, it should also be noted that a majority of the establishment's employees can also request a lower rate.

It's not just the employer.

So please refer to the instructions for the Form 8027 and regulation section 31.6053-3 for more detailed information on how to make this request.

Now, once we reviewed the information and if a lower tip rate is granted, the amount is then entered on line six of Form 8027 and you must also attach a copy of the IRS Determination Letter, which is Letter 8027-B Now, it grants approval to apply a lower rate and it outlines the applicable period the reduced rate can be applied.

Now, the rate reductions are approved on a temporary basis, so if the establishment needs to extend the applicable period, you must submit a new petition to the address listed in the instructions to be granted that extension.

Now, another area that causes a lot of confusion is how to calculate allocated tip.

And I'm going to say up front that we're going to walk through this and describe it.

But for really good examples of how to calculate allocated tips.

go to the Treasury reg 31.6053-3 -- you'll see multiple examples that can guide you through this process, but again, we're going to attempt to describe it for your benefit today.

So we've reviewed the data you must include in lines one through eight of Form 8027.

Now let's look at a quick example of an establishment who's directly tipped employees failed to report at least 8% of their sales as tips, and as a result, the establishment must allocate tips on their Form 8027.

First, let's review the data on Form 8027 to calculate the shortfall to allocate to the direct employees.

Now in this example, we have $650,000 in gross receipts on line five.

And we start by multiplying line five, gross receipts of $650,000, by our 8% on line six to determine the minimum -- $52,000 -- the employees collectively should have reported.

That amount will be the same as line sixth on your Form 8027.

Then you reduce the $52,000 by $11,700 of indirect tips reported on line 4A, because remember, we allocate tips only to directly tipped employees.

And that's also why it's important to complete Line 4A so that you can account for the tips that were tipped out to those indirect positions.

Now that leaves us with a minimum tip $40,300 that directly tipped employees should have reported.

Now, we take the $40,300, reduce it by the $17,000 of direct tips reported on Line 4B, by the directly tipped employees, to arrive at $23,300 shortfall or underreporting.

Now, the employer will then use the hours or sales of all directly tipped employees to determine each directly tipped employee's share of 8% of sales, and then they reduce this amount by each employee's tips reported to determine those employees who failed to report tips at 8% of their sales.

Next they will take each employee's ratio of their personal shortage over the total shortage in this calculation, multiplied by the shortfall of $23,300 to determine each employee's share of allocated tips.

Now again, I know this confusing, so you can refer to our Treasury reg that gives terrific examples of this.

But by walking through this calculation, this will ensure the employer only allocates the shortfall to those employees who did not report at least 8% of their sales in tips.

Okay, next, let's turn the page and talk about some underlying issues that can result in allocated tips, and what employers should look for.

Now a good gauge employers can use to monitor their employees tip reporting compliance is determine their average charge tip rate by using the charge receipts that had a charged tip.

This is the average tip left by customers on charge sales and provides a really good baseline to determine if your employees are reporting all their tips.

Now, for example, if they're charged tip rate is 20%, but employees are reporting an overall average tip rate at the establishment of 12% of their sales, this indicates they may be reporting less than 10% tip rate on their cash sales.

So now think about this.

Does it make sense for a customer to leave a 20% tip when they charge -- which, you know, we can see that -- you can see that amount -- but then only leave a 10% tip on cash sales, or their cash tickets?

Normally, there's not a significant difference between charged and cash tip rate, usually less than 4%, this depends on the type of establishment that you have.

So when you see a difference of 10%, your employees are likely underreporting their tip.

Now, there's always an exception, such as an employee working days during the week when most sales or tips are at night or on the weekends.

But for most employees, this comparison should alert the employer that the employees may be underreporting their tips because this can lead to additional liabilities for Social Security and Medicare taxes.

Now remember, tips are moneys provided to employees from customers as additional compensation, and we encourage all employers to educate their employees on their tip reporting requirements.

And we have many Publications as well as our new webinars to provide this important information.

Okay, next, let's talk about allocated tips.

Again, allocates tips are calculated separately on each Form 8027.

The first step in this allocation process is determine each directly tipped employee's share of 8% of sales or all method.

Used the sales or hours of all directly tipped employees to determine their share of the 8% of sales, then compare it to their tips reported.

If they reported less than 8% of sales, then allocate the shortfall to those employees only, and include that amount in Box 8 of form W-2.

Now, regardless of the allocation method, do not allocate any portion of the shortfall to a directly tipped employee who reported more than 8% of sales in tips.

And remember, the allocated tip calculation is just like the 8027, it must be done separately for each outlet and establishment.

So now that we've discussed the data, the format, and how to calculate allocated tips, I'd like to focus on some additional points to consider regarding the allocation of tips.

Now, this slide, in particular, is for employers who participate in the GITCA or TRDA Tip Agreement Program.

Now under a tip agreement, the employees elect to participate and report tips at or above an IRS established tip rate that is applied through payroll.

So once they elect to participate, their employer will apply that tip rate just the same as a wage rate.

Now, the established tip rates are based on financial data of the employer and represent substantially correct tip reporting compliance.

As such, the IRS will not audit an employee for unreported tip income if the employer participates in a tip agreement for the entire calendar year it is available to them.

Now, for employers under a tip agreement, if they have 100% of their employees at an established participating throughout the calendar year, the allocated tip calculation is not required because the employees are reporting their tips at or above the rate established and agreed upon by the IRS.

However, these employers are still required by law to prepare and file their Form 8027 for each large food and beverage establishment.

So next, we'll look at how an employer under a tip agreement determines if they have 100% participation by their employees.

Employers under a tip agreement must consider when new hires join the program and if existing employees participated for the entire calendar year it was available to them.

So first, let's look at the criteria for new hires.

Leann, would you like to discuss how employers under a tip agreement can determine whether their employee is considered a participant for the entire year?

Leann Danner: Yes, Jennifer, thank you, I would.

A non-participant is a newly hired tipped employee who doesn't join the program within 60 days of their date of for hire or join but failed to participate in the program for the remainder of the calendar year.

Participants must enroll and have tip rate applied to every hour worked from 60 days of their date of hire to the end of the calendar year.

Now, at your own discretion, employers can shorten that 60 day window.

And then that will be the controlling factor for when new hires need to join.

Employees who drop out of the program before the end of the year are also non-participants and subject to allocated tips if applicable.

So here's an example.

This employee was hired on March 5th of 2021.

On May 10th, the employee joined the program.

Is this employee a participant or a nonparticipant?

Not really true polling question, I'll give you the answer -- the employee in this situation is a nonparticipant for the entire year.

The employee needed to join the program by May 4 to be considered a participant for 2021.

Important to note that if you, as the employer, choose to shorten that 60 day time frame, that new window that you've established to sign up is the new controlling factor for the employee.

In other words, if the employer has a policy that all employees must elect to join within seven days of employment, then the employee in this example only had until March 12 to join the program.

And remember, non-participants can be subject to allocation of tips at the end of the year.

Likewise, if the employee joined but dropped out before the end of the calendar year, they are a nonparticipant and subject to allocated tip rule.

An existing tipped employee is a non-participant if they fail to participate for the entire calendar year the program is available to them -- for example, if an employee dropped out of the program during the calendar year, they are considered a nonparticipant for the entire year.

They are also considered a nonparticipant for the entire year when they first initially joined the program, but at mid-year during a year when a new agreement is implemented.

Simply put, employees cannot be a participant for any partial year.

Employees are either a participant or a nonparticipant for the entire calendar year.

The general rule is if an employee is a tipped position, did not participate the entire calendar year that the program was available to them, they are considered a nonparticipant for purposes of the annual reports required under the tip agreement.

Nonparticipants are required to report 100% of tips received and could be subject to allocated tips.

if a shortfall on Form 8027 is determined, and they reported -- the individual employee -- reported tips of less than 8% of their sales.

Finally, if an employee drops out, they cannot rejoin the program until January of the following calendar year.

They are not out for the entire contract period, but they must wait until the following January.

Okay, let's look at another example.

This employee timely elects to participate in 2021 by signing up in December of 2020.

On 11-15-2021, the employee drops from the program.

The employee is a nonparticipant because this employee failed to participate for the entire calendar year.

In this situation, it would be a good idea to discuss with the employee the reason for dropping out so late in the year, because non-participants are required to report 100% of tips received from customers and from other employees for the entire year.

They could be subject to allocated tip rule if there's a shortfall on Form 8027, and their tips reported are less than 8% of their sales.

So employers under a tip agreement develop a tracking system for employee participation status -- just sounds like more work, doesn't it?

But participation status is critical for accurately completing the Form 8027 and determining the applicability of the allocation of tips.

Okay, things to think about.

100% participation means that all directly and indirectly tipped employees participated in the program for the entire calendar year it was available to them.

So even though the indirectly tipped employee hours are not used when we're calculating allocated tips, their participation in the program is used to determine if the outlet has 100% participation.

Also, some food and beverage outlets have tipped employees on a rate of actual.

This means those employers have chosen to have their employees report 100% of their tips directly to payroll, and the IRS has agreed to the designation based on internal control and the ability of management to capture 100% of the tips.

Tipped employees that have a rate of actual are considered participants.

So if you're under a tip agreement and have 100% participation, you are still required to file a separate Form 8027 for every outlet or establishment, but you are not required to calculate allocated tips.

Something to note, if Form 8027 does show a shortfall and you've told us you have 100% participation, the IRS may conduct a compliance check to determine the source of the shortfall to ensure the tip rates are accurate and substantial tax compliance is achieved.

Okay.

Next, let's discuss treatment of allocated tip for tip agreement employers with less than 100% participation, and the outlet reported less than 8% of revenues as tips, which means they have an aggregate shortfall.

If the outlet or establishment has less than 100% participation and reports less than 8% of revenue as tips, then tips must be allocated.

To calculate individual employee allocated tips, use the individual employee ratio of sales or hours over the total sale or hours of all directly tipped employees.

Multiply this ratio by the directly tipped employee share of 8% percent of sales.

Then compare this number to each employee's sales amount to their tips.

Each employee's ratio of their personal shortage over the total shortage in this calculation is then multiplied by the aggregate shortfall to determine potential individual allocated tips.

Why do I see potential allocated tips?

Because then you must determine who is a participant and who is not.

Just remember, if an employee reported less than 8% of sales of tips then allocate only their percentage share of the total shortfall and include this amount in Box 8 of form W-2.

And regardless of the allocation method used, do not allocate any portion to a directly tipped employee who reported more than 8% of sales ins tips.

Remember that these calculations are to be completed by each outlet or establishment independent of each other.

That was a lot of information.

Evette, let's see how well I did on presenting this.

We have another polling question.

Evette Davis: Thanks, Leann, yes, that was a lot of information.

And Jennifer gave us a lot to think about, a lot to digest.

And actually, before we get to the polling question, folks, you can kind of look at that.

Someone had a great question because, Jennifer, you mentioned that the Treasury regulations were instructions on allocated tips.

What was the number?

What was that -- what was the Treasury reg on the instructions on allocated tips?

Jennifer Cunningham: It's Treasury regulation 31.6053-3.

And we will talk about it again and provide it again later in this presentation as one of the references.

Evette Davis: Awesome, awesome, awesome.

Okay, folks so that was Treasury regulation 31.6053-3, and you're going to hear more about that later.

Thank you, Jennifer. Thank you.

And okay, now we do have our fourth polling question.

So hopefully some of you have already been reading ahead and you already know what your response is going to be.

So we're going for 100%, right?

So this one says Blue Spruce Restaurant has a tip agreement.

Although most of the employees participated, they reported less than 8% of revenue as tips.

Which statements are applicable when calculating allocated tips?

Is it, A, Use all directly tipped employee hours or sales to calculate percentage of allocation to each; B, allocate tips to all employees who reported less than 8% of sales as tips; C, Not required to allocate tips due to the tip agreement; D, Only allocate to nonparticipating directly tipped employees who reported less than 8% of revenue in tips; or is it E, answers A and B; or F, answers A and B.

I feel like I need some Cs while we reread this question again to give everybody a chance to kind of review it and digest it again -- so look at the question.

Think about all the information you've heard from Leann and Jennifer and chose the response that you believe most closely answers this question.

Again, a lot of information shared here.

Blue Spruce Restaurant has a tip agreement.

Most employees participated.

They reported less than 8% of revenue as tips.

Which statements are applicable when calculating the allocated tips?

Okay, so we're going to give you another five, four, three, two, one.

Okay, let's go ahead and stop the polling now, and let's see what the correct answer is on the next slide.

My fingers are crossed.

And the correct answer is...

A and D.

Selection E, answers A and D.

All right. Okay.

What percentage did we get correct this time?

Okay, looks like we're at 58%, and that's okay.

Again, we're in the right place. We're all here to learn.

For those of you who answered correctly, great.

For those of you who missed it by that much, let's get an explanation from Leann so that we'll understand why is the answer E, answers A and D.

Leann Danner: This gets -- This can get really confusing, so I would love to talk about this.

Letter B is trying to trick us.

It says allocate tips to all employees who report less than 8% of sales with tips.

Remember in our example, it said under a tip agreement, when you're under a tip agreement, you will only report allocated tips to your nonparticipating employees who reported tips of less than 8% of their sales.

Employees who participate do not get allocated tips.

It is one of the benefits of our program.

And then letter C says, not required to allocate tips to tip agreement.

This only applies if you have 100% participation in the agreement.

In our example, it says most of Blue Spruce restaurant employees participate, which does not constitute 100%.

However, you will allocate tips to the non-participants, and you will allocate only their individual portion of that shortfall to each one of them, respectively.

Participants will not have allocated to the likely the entire overall shortfall for the entire restaurant won't be allocated because you will have participants who have potentially reported less than 8% of sales as tips, they will not have an allocation.

Participants in the program do not get allocated tips.

It is also not the nonparticipating employee's responsibility to shoulder all of the shortfall.

Each nonparticipant should only see their portion of the shortfall on their W-2 based on their ratio of hours worked or sales over the total directly tipped employee hours or sales.

So again, look at the Treasury regs, and we'll cover that again in a little bit.

There are some great examples on how to walk through this process.

So hopefully that clears up why the selection is letter E, both A and D.

Evette Davis: Thank you, Leann, yeah, that's a lot of information again, and thank you so much to Jennifer and to you for giving us those resources so that we can go back and read this information and digest it once again.

So this is great stuff.

Okay, thank you, thank you.

Walter, would you like to tell us about some common errors that we see on the Form 8027?

Let's bring you back in.

Walter Budzinski: I will, thanks, Evette, and to piggyback off of Leann's football reference, thanks for pulling me off the bench and getting me back into the game, so I appreciate it.

So we're going to go ahead and shift gears back to the general Form 8027 rules, and we're going to take a look at some common errors to avoid.

So every year, the IRS returns numerous Form 8027s because the taxpayer prepared one form 8027 that includes revenues for multiple locations such as a chain of restaurants or for multiple activities within the same establishment, such as outlets within a casino.

So a separate Form 8027 must be filed for each business operation or activity.

And then, as we previously discussed, there are several general terms that are used, such as outlet, venue, location or establishment.

So with the food and beverage, gross receipts are tracked separately, then a separate Form 8027 must be filed for each revenue center.

So, for example, a restaurant may be required to file more than one Form 8027 if their dining and bar areas are under separate revenue centers.

So another common error is the Form 8027 that includes non-allocable sales.

So remember, non-allocable sales are sales where tipping isn't customary.

So non-allocable sales include retail items like T-shirt sales and carry out food sales.

These sales should be excluded from line 2, charged receipts, and line five, gross receipts, when preparing Form 8027.

When charge receipts on line 2 is greater than gross receipts on line five, there's a problem.

Gross receipts include charged receipts, so it should not be a lower number.

Remember, line two, charge receipts, should only include charged sales that had a charge tip and should exclude charged sales with no tip or non-allocable sales, such as sales with an associated auto gratuity or service charge.

And then this ties into another common error we see, which is the Form 8027 including service charges, auto gratuities in charged tips on line one and the related sales in charge receipts line two and then gross receipts on line five.

Auto gratuities and service charges and the related sales should be excluded when preparing Form 8027.

So now let's cover the common errors for employers with tip agreements.

Another common error relates to employers who participate in a tip agreement and either include allocated tips on participant W-2s or fail to calculate include allocated tips on Form W-2 for nonparticipating employees.

So remember, if an establishment has 100% participation, they do not have to allocate tips.

That's because 100% of their employees are participating, both direct and indirectly tipped employees.

So if an establishment has less than 100% participation, they must calculate allocated tips.

If allocated tips apply, the establishment must apply any shortfall to nonparticipants who reported less than 8% of sales in Box 8 of Form W-2.

Next, for employers under a tip agreement, allocated tips are reported in Box 8 of Form W-2 for nonparticipating employees only.

Non-participants do not have any of the benefits of a tip agreement.

Nonparticipating employees do not have established tip rates and are required to report 100% of their tips received from both customers and other employees.

If a shortfall is calculated on line seven of Form 8027 and a nonparticipating employee failed to report at least 8% of sales in tips, the employer will report allocated tips in Box 8 of form W-2.

So what are the common errors to reject Form 8027?

Before you file your form 8027, please review the form, your payroll and financial data, and finally, the mathematical computations.

If charged receipts from line two is greater than gross receipts on line five, there is a problem and further analysis of financial data should be reviewed.

If line 4A, tips reported by indirectly tipped employees, plus line 4B, total tips reported by directly tipped employees, do not equal line 4C, total tips reported, check for an adding error or a typo on one of those lines.

Check for accuracy.

If line six is not line five gross receipts times by 8%, then you must have IRS approval to apply less than 8%.

So remember to attach the IRS determination letter with your Form 8027.

If line eight, total number of directly tipped employees, is blank, review the number of tipped employees who worked during the year.

This includes employees who have since separated from employment.

So, Evette, do we have time for another polling question?

Evette Davis: You bet we do. We do, we do, Walter.

Thank you so very much.

Okay. So this is our fifth and final polling question.

Man, that went by quickly.

All right, so Spruce Steakhouse is preparing their Form 8027 for the prior tax year.

Which common errors did they find while reviewing line two, charge receipts, and line five, gross receipts?

Is it A, includes auto gratuity revenue; B, includes catering revenues; C, includes carry out revenues; D, excludes taxes, tips, and retail sales; or are we talking about E, answers A, B and C; or F, answers A and C?

Okay, so think about what you just heard from Mr. Walter there and all the information that he gave to us, and just kind of take a minute, review the question again and click the radio button you believe most closely answers this question.

Steakhouse is preparing their Form 8027 for the prior tax year, which common errors did they find while reviewing line two, charge receipts, and line five, gross receipts.

Okay, look at the answers.

Pick the one that most closely answers this question.

Just want to give you a few more seconds to make your selection.

And we will close the polling in five, four, three, two, one.

Okay, now let's share the correct answer on the next slide.

And the correct answer is E, answers A, B and C.

I feel like they need to do a drum roll here, folks, but let's see what percentage of you responded correctly, because again, this is some tricky information.

Okay, so it looks like we are at 39%.

Yeah, I figured it was going to be, like I said, tricky, tricky things here.

But I'm sure you probably got one of the three answers correct.

So, Walter, can you kind of help us out please?

Tell us why the answer is A, B and C.

Walter Budzinski: Okay, so the question is looking for the common errors that they found.

And so remember, if you look at line -- if you look at number A, auto gratuity revenues, remember that auto gratuities are not included on Form 8027 in lines number two for charge sales with charged tips, or line five, gross receipts.

Those are actually excluded.

When we look at number B, "includes catering revenues" -- catering revenues tend to be one where an employer is going to assess a service charge like a banquet to that, and that would not be included.

Plus, also, catering isn't really considered, you know, customary for tipping, and that may be because of the fact of the service charges that get added on.

Number C, "included carry out revenues." Again, that's going to be excluded.

You will see that in the Form 8027 instructions that say, you know, carry out revenues are going to be excluded from that.

And so those are the three common errors.

And then D is actually would be correct.

You do exclude taxes, tips, and retail sales.

Evette Davis: All right. Thank you so much, Walter, again, folks, you are in the right place, talking to the right people -- side note, I hope you're getting your questions in, because that part is coming up very soon.

Okay, thank you so much, Walter.

Jennifer, looks like you have some resources you'd like to share with us.

Jennifer Cunningham: Yes, and actually in keeping with the football season theme, let's consider this half time.

Just sit back and relax while I share with you the resources we have on the various topics we've discussed today.

So not only are we talking about it, we're also going to give you references that you can refer to later.

So first, let's start with IRS.gov.

I know Evette has talked about a lot of good information we have available, but we also have a lot of educational materials that can be ordered and downloaded at IRS.gov regarding the tipping industry.

We've listed here several resources to assist in preparing and filing Form 8027, and if your employees consistently receive tips, or receive -- report tips less than 8% of their sales, we've also included instructions on how to petition to apply a lower tip rate.

Next, if you're a CPEO, you can also refer to IRS.gov/CPEO for additional information on your responsibilities.

And finally, we have the Internal Revenue Bulletin 2020-1, which provides guidance on the filing fee to petition to apply a lower rate.

Okay, next, we have Publication 1239, which is an excellent resource on how to file the Form 8027 electronically.

But remember, you must apply to file electronically.

So if you're interested in doing that, start early.

Now, the second thing we have here, we're referring to Revenue Ruling 2012-18, to assist in understanding the difference between an auto gratuity and a tip so that you will know what to exclude from Form 8027 and how to accurately report them on the form W-2.

And finally, this is the important one that you need to jot down -- this is the Treasury Regulation Section 31.6053-3 which provides additional guidance on first how to prepare your Form 8027; most importantly, how to calculate allocated tips, and also how to request to apply a lower tip rate.

Now, if you'll look at -- if you will refer to page 387 of that regulation, that's where the examples on how to calculate allocated tips begin.

So again, page 387.

Next, we have Publications 3144 and 3148 available to educate employees and employers on general tip reporting requirements.

And then finally, we have Publication 1244, which is a daily tip log to assist employees in recording and reporting their tips to their employers.

And finally, Publication 4932 is for employers and explains the benefits of the Gaming Industry Tip Compliance Agreement Program and begins the transition to additional resources available to employers participating in a tip agreement.

Here we continue with the Publications available to educate employees and employers on the gaming industry tip agreement programs -- Publications 4985 and 5111 explain the many benefits available to participating employees, while Publication 4936 outlines the employer's obligations to maintain their GITCA agreement.

And finally, we've included the email address for those employers under a tip agreement to submit their required year-end report.

So, Evette, I think that covers many of the resources we have available to the employers, so back to you.

I guess half time is over.

Evette Davis: Half time is over.

Let's get into the third quarter here.

Let's see. Thank you, Jennifer. All right, folks.

Hello again, it's me, Evette Davis, and I'll be moderating the Q&A session.

Earlier, I mentioned that we want to know what questions you have for our presenters.

Here's your opportunity.

Now, if you haven't input your questions, there's still time, so go ahead and click on the dropdown arrow next to "Ask a question," type your question in the field and click "Send." Our speakers are staying on with us to answer your questions, but just one more thing before we get started.

We may not have time to answer all the questions submitted.

However, let me assure you we will answer as many questions as time allows.

Okay, let's go ahead and get started so we can get to as many questions as possible.

And I'm going to go over to you, Jennifer, with our first question, the first question from our audience, and it says, is it okay to check the final return box when submitting the Form 8027 returns that I want posted for the year?

Jennifer, what's the response to that? Is it okay?

Jennifer Cunningham: Okay. Actually, no, it's not.

The purpose of the Form 8027, or the purpose of the Final Return box on the Form 8027 is only to be checked when the -- when the establishment closes or if the establishment has been sold and the new owner has a different EIN.

So just because you're filing it, filing it that year, and you think, well, this is the final one that I'm filing for this particular year, you would not check the "Final Return" box.

It's only if the establishment closes or has been sold, and the new owner has a different EIN number.

Evette Davis: Hmm, that's good.

Okay, that's a good question. Okay, thanks, Jennifer, for that great explanation.

Hi, Walter, I'm coming down the field, I'm about to hand you the ball.

This question says, okay, I have a tip agreement with the IRS.

Do I have to email the 8027 form to the SBSE mailbox when I mail them in February to Ogden?

I know we talked about this.

What is the response with it?

Walter Budzinski: Oh, thanks, Evette, that's a great question, because I actually get asked this question generally every year, and the answer is yes, all employers under a tip agreement must also emailed the 8027 forms to SBSE.tip.compliance@IRS.gov when they are submitting all of their year-end required information.

And the reason is that is that if they only file it with the service center, the information is not going to be provided to our national tip reporting compliance until much later date.

We can't see what the service center has.

So if you file that information with them, we don't know, first of all, if it's been filed and we don't know when information has been filed, so we can't see anything.

So therefore, by emailing it directly to that SBSE mailbox, we can ensure that an employer under a tip agreement is compliant with the terms of that agreement.

Evette Davis: Wow. Okay. Yeah, that was a good question.

Okay. Good. Good, good. Good. Thank you, Walter, for that great explanation.

All right, folks, you've got a lot of good information, a lot of good questions here. So the next one, I'm going to come down the field to you, Leann.

And this person asks the following question.

Our restaurant adds 18% auto gratuity to checks of parties of six or more.

15% is given to the waitstaff and 3% to the bus staff.

Do we include that 3% on line three of the Form 8027 since it's less than the 10%?

Hmm.

Leann Danner: Well, Evette, yes -- no, we would not want you to include that on line three; to be included on line three, the total amount of the service charge or auto gratuity billed to a customer has to be less than 10%.

It's not determined based on a percentage to each occupation.

Since this is 18%, that would be greater than the 10% that would go on line three, but we've got a total of 18%, so it won't go on line three Evette Davis: Okay, that makes a lot of sense.

Okay, good, good. Good. All right.

Let's get those instructions out, folks, and make sure -- that this is a lot of good information.

So Jennifer, I'm going to come back to you with this person's question, okay?

This person says they have a hotel.

Let's see, "Our hotel has room service.

Hmm. We add a 20% auto gratuity to all transactions.

Do I have to file Form 8027 for room service?

Good question.

Jennifer Cunningham: Okay, you're going to love this answer.

And the answer is no, you don't have to file Form 8027, and that's because 100% of your sales have an auto gratuity on their transactions.

Okay, so that means there would be zero sales reported on line five of Form 8027.

However, the other thing that we often see is that customers will often get confused, not see the auto gratuity added on the check, and go ahead and add an additional charged tip to that check.

So if that happens, those are -- those additional charged tips are to be treated as tips and must be reported in Box 7 of the employee's W-2.

But again, the answer is no, you would not be required to file Form 8027.

Evette Davis: Okay, good. Good. Good, good. That was a great question.

Okay, folks, so we've got some smart people on the line here today, so hopefully everybody else is taking some notes here.

Okay, Walter. I'm coming back to you with this next question.

And she says, "I own a restaurant that is only open nine months of the year and closed during the winter.

Do I count one of the months that I'm closed when I use the worksheet to determine if there is more than 80 hours work?

Good question, Walter.

Walter Budzinski: Yeah, that is a very good question, Evette, and I can understand asking it, but you know, you're not going to use the month that you're closed.

So you're going to use one of -- you're going to actually use two of those nine months.

You're going to use the one month that had the lowest volume of sales, and then you're going to use the month that had the highest volume of sales, and then you're going to go ahead and complete that worksheet that's in the Form 8027 instructions to see if you meet that 80 hour test.

And so you're going to be, you know, looking at the lowest and highest sales and then, you know, taking those hours, and then you're going to be doing some math to figure out if between those two months if the average days opening and hours open then come out to be more or less than 80 hours.

So if it ends up being more than 80 hours, then you must file the form.

And if it's less than 80 hours then you're not required to file the form.

So remember, the instructions has that, you know, worksheet for you to be able to complete.

And then once you're, you know, working on it, you're looking at the hours.

Just also remember that you're not just only looking at tipped employees, you're also looking at tipped and non-tipped employees when you're determining their hours.

So it's going to be everybody -- managers to dishwashers, bartenders, servers, you know, et cetera.

Evette Davis: Wow, you said the worksheet, that's the 10 employee test worksheet, that's the -- Walter Budzinski: Yes, it is, Evette.

Evette Davis: Good. Good, good. Good. Good. Okay, that's good. That's good.

Okay, let's see. Let's find another really good question.

All right, Leann, I'm going to toss the ball to you, okay?

This person says, "You said I shouldn't wait until the last minute to get authorization to electronically file form.

When should I contact the IRS to get authorization?" Well, a good question. Leann?

Lean Danner: Well, Evette, in order to file electronically, they need to get a transmitter control code from the IRS through the FIRE system in order to use the FIRE system.

So you, they have to submit a Form 4419 by November 1st of the year prior to the return due date, as it takes at least 45 days to receive this code.

If you need additional information on filing the Form 8027 electronically, the Publication 1239 has got some great information in it.

Evette Davis: Wow, okay, good, good, good, good, good.

All right. I'm learning a lot today.

Okay, so glad you put in your questions here.

Okay, Jennifer, let me come over to you with this next question.

So they say, "We have a tip agreement with the IRS.

I was told to add zero to line seven when tips reported were less than 8%.

Everyone participates in the agreement.

But why do I need to say there are no allocated tips on the form?

Hmm. Jennifer?

Jennifer Cunningham: Okay, remember, employers that are under a tip agreement have a little different, more unique reporting requirements on Form 8027.

Now, the reason they would add zero to line seven is because the participants in the tip program do not receive allocated tips.

And remember if they have 100% participation and they are, you know, in the tip agreement, that means that the IRS has worked with them to establish tip rates that -- and they are substantially tip reporting compliant, so therefore with 100% participation, they would not be required to allocate tips.

Now the other thing, though, that you need to remember is that, you know, if you do the calculation on line seven and it looks like you would need to report -- your employees reported less than 8% of sales, then you should include a statement on the form advising the IRS that all tipped employees participate in the GITCA or TRDA.

Basically, that I have 100% participation, therefore, I am not required to allocate tips.

Evette Davis: Wow. Okay. Okay. Thank you so much. Okay.

So please remember Publication 4932, I think that's going to be a great, great help with that particular question as well.

So. Okay. Thank you, Jennifer.

Walter, I'm going to come on over to you once again with this next question.

And the person states that I am only open for five hours in the morning for breakfast, I average about 12 employees who work six hours every day.

Am I required to file the forms since more than 10 employees work each day?

Hmm, Walter?

Walter Budzinski: Well, um, so, you know, let's look at it this way, you may be required to file the form and with based on the information that question, it really doesn't have to do with the ten employees.

So if you have 12, that doesn't necessarily mean you're required to file the form.

Remember, we're looking at the hours worked and it's the, you know, the worksheet in the instructions that need to be completed to determine, if I were looking at, you know, just the math and that question, 12 employees at six hours a day, that would be 72 hours.

And then the answer to that would be no.

However, you know, you would need to know if that includes all the employees who work at the establishment and not just, you know, the tipped employees.

And, you know, do they really work six hours a day or could it be a little bit more?

But that's where, you know, again, you do the worksheet, and you determine if whether or not the 80 hours are met or not.

And again, if it's, you know, under 80 hours, no, you're not required to file the form.

And if it's over 80 hours, then you would.

So you know, if you actually had all those employees and they actually worked seven hours a day, then, you know, you'd have 84 hours and it would exceed.

So I mean, the best thing to do is just, you know, go back to the 8027 instruction and then refer back to that 10 employee test, and then, you know, use again the highest volume and lowest volume of sales in those months, and then, you know, make the determination of whether or not the hours worked, you know, meet the requirement filing.

Evette Davis: Okay. Okay. Good stuff, good stuff, Walter.

And thank you for that reference, that resource that everybody can use.

All right, Leann.

Leann, I'm coming over to you with this question and this may be our last question.

looking at the clock, so -- all right, Leann.

This person says, I mailed Form 8027 to the Ogden address at the end of February.

However, I mailed an amended form to the IRS in March because of an error.

Ooh, the new form now shows allocated tips.

Do I need to do anything with the allocated tips?

Leann, can you help us out, please?

Leann Danner: Actually Evette, if you find yourself in this situation, yes, you will need to determine which directly tipped employees reported less than 8% of sales tips and calculate the amount of allocated tips to be reported to each employee.

You will need to file W-2Cs for each affected employee and furnish the corrected form to those employees.

Evette Davis: Wow. Oh, my goodness.

Okay, folks, this was just awesome, and I am so sorry, but that is all the time we have for questions.

What great questions you had, what great responses and great resources.

I just want to take a moment to thank our speakers Jennifer Cunningham, Walter Budzinski, and Leann Danner for sharing their knowledge, their expertise, and for answering your questions.

Before we close, though, the Q&A session, Jennifer, what key points do you want the attendees to remember from today's webinar?

Jennifer Cunningham: Okay. First and foremost, the thing that we have said, probably more than anything else today: Make sure to file a separate Form 8027 for each activity or revenue center.

If an establishment runs a deli in the day and a steak house at night and keep separate records, a separate form 8027 is required for each operation.

If you have multiple locations, each location must file a separate form 8027.

That's first and foremost.

Now, another reminder is about what receipts to include or exclude on Form 8027.

Make sure you include receipts and tips for food and beverages that you've provided, but also make sure you exclude all non-allocable receipts.

Again, what are non-allocable receipts?

Those are receipts for services that do not customarily receive a tip, as well as merchandise sales such as bottled sauces or recipe books or ball caps.

And next, let's talk about auto gratuities -- you should remove revenues with auto gratuities from line five, gross receipts, and line two, charge receipts, because, per rev ruling 2012-18, paid auto gratuities are wages, not tips.

So both the auto gratuities and related revenues must be excluded when you file your Form 8027.

And of course, you know, we've talked about allocated tips, how many times today?

So again, to calculate allocated tip, you must use the hours or sales for all directly tipped employees to determine the percentage of the 8% of sales to allocate to each directly tipped employee.

However, you will only allocate shortfall calculated on line seven to directly tipped employees who reported less than 8% of revenue in tips.

Employers must also include allocated tips in Box 8 of form W-2 for employees who reported less than 8% of sales.

And remember, go to page 387 of the Treasury Regulation 31.6053-3 and that will show you numerous examples of how to calculate allocated tip.

And then, of course, we want to encourage everybody to file electronically.

Even if you can file a paper, come into the 21st century and file electronically -- electronic returns are processed more quickly, provide greater turnaround.

And if issues are found, you know you can correct them easier, there's faster compliance for correct filings.

However, don't wait until the last minute because you must request authorization to file electronically.

And finally, here's one of our best tax tips for the day.

Prepare the Form 8027 in draft in January, so that you will know if you need to include allocated tips on any form W-2, although the paper form is not required to be filed until February 28th or electronically until March 31st.

We recommend you prepare it prior to issuing your W-2s so that you know if an allocation of tips is required.

Now again, you must include allocated tips in Box 8 of form W-2 of certain tipped employees.

If the W-2s are prepared and issued without determining allocated tips, W-2Cs will need to be prepared for all affected employees.

So with that, Evette, I think that covers the key points we want everyone to remember.

So back to you.

Evette Davis: Thank you so much, Jennifer.

Those are all excellent reminders, and I think we've made a couple of touch down during this session.

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