Restaurant tip reporting: Form 8027, the 8 percent rule and allocated tips

A restaurant's tips are the employees' money, but the business has tax duties around them. Employers must collect tip reports, withhold taxes and report them, and larger food and beverage establishments must also file an annual return that compares reported tips with sales. This guide, checked in October 2026, explains the federal rules in plain terms, for owners in any state, including North Carolina and Georgia. It is general information, not tax advice. Use the IRS instructions for the current year and ask an accountant to review your process.

What are your basic duties for tips?

Employees must report their tips to you in writing by the deadline in the IRS rules, and you must include reported tips in their wages for income tax, Social Security and Medicare withholding. Ask employees to use a written report, such as a daily or weekly tip log, and keep it on file. You must also withhold from wages or collect from other sources if tips are not enough to cover the tax. Credit card tips are tracked through your point-of-sale system. The IRS publishes guidance on tip recordkeeping and reporting that you can use to design your forms.

What is Form 8027?

Form 8027 is an annual information return for large food or beverage establishments. It applies where tipping is customary and the business had more than ten employees on a typical business day in the prior year. Sources differ on how the headcount is tested, with some describing full-time equivalents and others an hours-based test, and a business with several locations combines staff across sites, so read the IRS instructions for the current year. You file a separate form for each location. The form reports your gross receipts from food and beverages, the tips that employees reported and any tips you allocated.

What is the 8 percent rule?

If the tips that employees report are less than 8 percent of the establishment's gross receipts from food and beverages, the employer must allocate the shortfall among the employees who customarily receive tips directly. The default allocation rate is 8 percent. The employer can allocate using the hours-worked method, the gross-receipts method or, with the agreement of enough tipped employees, a good-faith method. The IRS can approve a lower rate on application when the establishment shows that tipping patterns support it. Employees who receive tips indirectly, such as cooks and bussers, are generally not allocated tips under this rule.

What are allocated tips?

Allocated tips are an amount assigned to an employee when reported tips fall short of the test. They appear in Box 8 of the employee's Form W-2. According to IRS guidance and payroll guides, no income tax, Social Security or Medicare tax is withheld on allocated tips, but the employee must still report them as income on a tax return. Explain this to your staff in plain language when you allocate. A pattern of allocation is a sign that reporting is too low, so talk to your team about accurate tip reports.

What is the FICA tip credit?

Restaurants that pay the employer's share of Social Security and Medicare tax on employees' tips may be able to claim a federal tax credit for part of that cost. The calculation is technical and depends on the wage rules and the tips, so ask your accountant whether it applies to your business and to prepare it.

Because the calculation can be done wrongly in both directions, make sure the preparer understands how your tip credit and your tips fit together. Keep the worksheet in your records.

When is it due?

The return has its own deadlines, with different dates for paper and electronic filing, and the dates change each year. Check the IRS instructions for the filing year and mark the dates, and the W-2 deadline, on your calendar. If you file electronically, you may need to register for the system in advance. Ask your payroll provider whether it files the return for you.

What records should you keep?

Keep employee tip reports, daily sales by category, credit card tip totals, tip pool records, allocation worksheets, copies of the returns and proof of filing. The records support your return and protect you in an audit. Keep them for the period the IRS requires, and store them safely.

Consider reconciling tips each pay period instead of each quarter. Compare tips on your sales reports with the tips on your payroll register, and look for gaps. If a server's reported tips look low compared with colleagues in the same section, talk to them. Offer training on what must be reported, and make the process simple with a form on the point-of-sale screen. Your payroll provider may already have a tool, so ask what it offers.

What mistakes are common?

Relying on estimates of tips, failing to count cash sales correctly, ignoring the allocation rule, including a manager's share in the pool, missing deadlines and failing to give employees clear instructions on reporting. A short training for managers and a monthly check of tip reports prevent most errors.

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