IRS Form 8027 is the annual information return that large food and beverage establishments use to report gross receipts, the tips employees reported to the employer, and any tip amounts allocated to employees when reported tips fall short of 8% of qualifying sales. It’s due the last day of February on paper, or March 31 if you file electronically. The IRS uses the data to spot tip underreporting, and penalties start at $60 per return and climb from there.
Who Has to File
You must file Form 8027 if your business meets two conditions: it primarily serves food or beverages for on-premises consumption where tipping is customary, and it passes the 10-employee test for the preceding calendar year.1Office of the Law Revision Counsel. 26 U.S. Code 6053 – Reporting of Tips
Restaurants, bars, cocktail lounges, and catering halls typically meet the first condition. Fast-food operations and establishments where staff don’t customarily receive tips are outside the form’s scope. If customers don’t tip at your place, the form doesn’t apply.
The 10-Employee Test
The test measures average employee hours on a typical business day, not a simple headcount. The IRS instructions include a worksheet.2Internal Revenue Service. 2025 Instructions for Form 8027
Take half of total employee hours worked during the month with the highest food and beverage receipts, divide by the number of days open that month, and repeat for the month with the lowest receipts. Add the two results. If the combined figure is more than 80, you have to file.
A few details catch employers out:
- Count every worker at the food and beverage operation, not just servers and bartenders.
- If you run multiple food and beverage locations, combine the hours across all of them rather than testing each site separately.
- Anyone who owns 50% or more of a corporation’s stock is not counted as an employee for this test.
- Employees at fast-food operations are excluded.
The Numbers You Need
Form 8027 asks for five figures, and every calculation flows from them.3Internal Revenue Service. Form 8027 – Employer’s Annual Information Return of Tip Income and Allocated Tips Track them as you go rather than reconstructing at year end.
- Line 5, gross receipts from food and beverages. Total sales for the calendar year, excluding carryout sales, sales with a mandatory service charge of 10% or more, and sales from rooms where tipping isn’t customary. This number is the denominator in the 8% calculation, so accuracy matters most here.
- Line 2, total charge receipts. Sales paid by credit card, debit card, or other charge arrangement. These create a verifiable trail the IRS can cross-check.
- Line 1, total charged tips. The tip amounts shown on those charge receipts.
- Line 3, service charges under 10%. Any service charges below 10% paid as wages to employees. These count as gross receipts but not as tips, and must be reported separately.
- Line 4c, total reported tips. Combined tips reported to you by directly and indirectly tipped employees during the year.
Pay close attention to the Line 5 exclusions. Carryout comes off the top because no table service was involved. Sales where you added a service charge of 10% or more are excluded because the charge replaces the voluntary tip. Undercounting your exclusions inflates your gross receipts figure, which can push you into allocating tips you wouldn’t otherwise owe.
When Allocation Kicks In
If total tips reported by employees are less than 8% of qualifying gross receipts, you have to allocate the shortfall among tipped employees.1Office of the Law Revision Counsel. 26 U.S. Code 6053 – Reporting of Tips The gap between 8% of gross receipts and actual reported tips is the “allocable amount.”
If your qualifying gross receipts are $2 million, the 8% threshold is $160,000. If employees collectively reported $140,000, the $20,000 shortfall gets allocated.
Allocated tips are a tax-reporting figure, not cash you hand out. You aren’t distributing money. You’re reporting on paper that each employee’s tip income, for tax purposes, should be at least a certain amount.
The 8% rate is a statutory default. You or a majority of your employees can petition the IRS for a lower rate if the actual tipping rate at your establishment is genuinely below 8%, though the IRS won’t approve a rate under 2%.2Internal Revenue Service. 2025 Instructions for Form 8027
How to Allocate the Shortfall
Federal law gives you two paths: a good faith agreement with your employees, or, if none exists, one of the methods set out in IRS regulations (hours worked or gross receipts).1Office of the Law Revision Counsel. 26 U.S. Code 6053 – Reporting of Tips
Good Faith Agreement
The most flexible option, but it needs real buy-in. The agreement must be written and consented to by at least two-thirds of the tipped employees in each occupational category affected, meaning separate consent from servers, bussers, bartenders, and so on if the formula treats them differently. The resulting allocation, combined with reported tips, must reasonably approximate actual tip distribution at the establishment. It takes effect at the start of a payroll period and can be revoked by a two-thirds vote, also only at the start of a payroll period. The IRS can reject the agreement if the allocation looks unreasonable.
Hours-Worked Method
The simplest to administer, and the common default when there’s no agreement. Each tipped employee gets a share of the shortfall equal to their share of total tipped hours for the year. An employee who worked 5% of tipped hours is allocated 5% of the shortfall. You apply this method consistently for the full calendar year.
Gross Receipts Method
This method allocates based on each employee’s share of the establishment’s sales. It requires tracking which sales belong to which employee or shift, so it’s heavier to administer. Restaurants whose point-of-sale systems already track server-level sales sometimes prefer it because the allocation lines up more closely with actual earning potential.
Whichever method you use, the allocation for any employee only covers the gap between what they reported and their proportional share of the 8% threshold. An employee who already reported at or above their share gets no allocation.
What Employees Do With Allocated Tips
Allocated tips go in Box 8 of the employee’s W-2, separate from reported tips (Boxes 1 and 7). You do not withhold income tax, Social Security tax, or Medicare tax on the allocated amount.4Internal Revenue Service. Tips
Employees generally report the allocated amount as income on their personal return using Form 4137, which also calculates the Social Security and Medicare tax owed. There’s one important exception: an employee who kept adequate records showing they actually received less than the allocated amount doesn’t need to report the full allocation.5Internal Revenue Service. Tip Recordkeeping and Reporting A daily tip log is the cleanest way to keep that record.
Deadlines and How to File
Paper filers have until the last day of February following the calendar year the return covers. Electronic filers get until March 31.6Internal Revenue Service. About Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips
Electronic filing is mandatory if you file 10 or more information returns of any type during the year. Form 8027 goes through the IRS’s FIRE (Filing Information Returns Electronically) system, which requires compatible software.7Internal Revenue Service. E-file Information Returns
One qualifying establishment means one Form 8027. Two or more means a separate Form 8027 for each, submitted together with Form 8027-T, which transmits and aggregates the individual returns.8Internal Revenue Service. About Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips
Filing with the IRS doesn’t close out your obligation to the worker. You still have to furnish a W-2 showing the Box 8 allocated tip amount by the standard January 31 deadline.1Office of the Law Revision Counsel. 26 U.S. Code 6053 – Reporting of Tips
Penalties for Late or Incorrect Filing
Penalties for a late or wrong Form 8027 fall under Section 6721, which covers information returns generally. The per-return amounts for returns due in 2026 are:9Internal Revenue Service. 20.1.7 Information Return Penalties
- Corrected within 30 days of the due date: $60 per return.
- Corrected after 30 days but by August 1: $130 per return.
- Not corrected by August 1: $340 per return.
- Intentional disregard: $680 per return, with no annual cap.
A separate penalty under Section 6722 applies when you fail to furnish correct W-2 statements with the allocated amount. The tiers and dollar amounts mirror Section 6721.10Office of the Law Revision Counsel. 26 USC 6722 – Failure to Furnish Correct Payee Statements One oversight can draw two sets of penalties: one for the return you didn’t file with the IRS, and another for every W-2 you didn’t deliver.