Credit card sales.   You must complete lines 1 and 2 to report tips and sales (receipts) from credit cards, debit cards, and other charges.

Rounding off to whole dollars.   You may round off cents to whole dollars on your return and schedules. If you do round to whole dollars, you must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $1.39 becomes $1 and $2.50 becomes $3.

  If you have to add two or more amounts to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

Line 1 — Total charged tips for calendar year 2003.   Enter the total amount of tips that are shown on charge receipts for the year.

Line 2 — Total charge receipts showing charged tips.   Enter the total sales (other than nonallocable receipts as defined on page 2) from charge receipts that had a charged tip shown. Include credit card charges and other credit arrangements and charges to a hotel room unless your normal accounting practice consistently excludes charges to a hotel room. Do not include any state or local taxes in the amounts reported.

Line 3 — Total amount of service charges of less than 10% paid as wages to employees.   Enter the total amount of service charges of less than 10% that have been added to customers' bills and have been distributed to your employees for the year. In general, service charges added to the bill are not tips since the customer does not have a choice. These service charges are treated as wages and are includible on Form W-2. For details, see Revenue Ruling 69-28, 1969-1 C.B. 270.

Line 4a — Total tips reported by indirectly tipped employees.   Enter the total amount of tips reported for the year by indirectly tipped employees, such as cooks, bussers, and service bartenders.

Line 4b — Total tips reported by directly tipped employees.   Enter the total amount of tips reported for the year by directly tipped employees, such as bartenders and waitstaff.

  

  In figuring the tips you should report for 2003, do not include tips received by employees in December 2002, but not reported until January 2003. However, include tips received by employees in December 2003, but not reported until January 2004.

Line 5 — Gross receipts from food or beverage operations.   Enter the total gross receipts from the provision of food or beverages for this establishment for the year.

  If you do not charge separately for providing food or beverages along with other goods or services (such as a package deal for food and lodging), make a good-faith estimate of the gross receipts from the food or beverages. This estimate must reflect the cost to the employer for providing the food or beverage plus a reasonable profit factor.

Line 6.   Enter the result of multiplying line 5 by 8% (.08) or a lower rate (if the establishment was granted a lower rate by the IRS).

  If a lower percentage rate was granted, write the rate in the space provided and attach a copy of the IRS determination letter.

  

  The 8% rate (or lower rate) is used for tip allocation purposes only. Using this rate does not mean that directly tipped employees must report only 8%. They should report the amount of actual tips received.

  

  If you have allocated tips using other than the calendar year, put an “X” on line 6 and enter the amount of allocated tips (if any) from your records on line 7. This may occur if you allocated tips based on the time period for which wages were paid or allocated on a quarterly basis.

Line 7 — Allocation of tips.   If the amount shown on line 6 is more than the amount of tips reported by your employees on line 4c, you must allocate the excess to those employees. Enter the excess on line 7. There are three methods by which you may allocate tips. Check the box on line 7a, b, or c to show the method used.

Line 7a — Hours-worked method.   Establishments that employ fewer than the equivalent of 25 full-time employees (both tipped and nontipped employees) during a payroll period may use the hours-worked method to allocate tips. You will be considered to have employed fewer than the equivalent of 25 full-time employees during a payroll period if the average number of employee hours worked (both tipped and nontipped employees) per business day during a payroll period is less than 200 hours.

  To allocate tips by the hours-worked method, follow the steps for the gross receipts method below. However, for the fraction in step 3 of the gross receipts method, substitute in the numerator (top number) the number of hours worked by each employee who is tipped directly, and in the denominator (bottom number) the total number of hours worked by all employees who are directly tipped for the payroll period. See Regulations sections 31.6053-3(j)(19) and 31.6053-3(f)(1)(iv) for details.

  If you use the hours-worked method, be sure to enter in line 7a the average number of employee (both tipped and nontipped) hours worked per business day during the payroll period. If the establishment has more than one payroll period, you must use the payroll period in which the greatest number of workers (both tipped and nontipped) were employed.

Line 7b — Gross receipts method.   If no good-faith agreement (as explained below) applies to the payroll period, you must allocate the difference between total tips reported and 8% of gross receipts using the gross receipts method (or hours-worked method (line 7a)) as follows (see example below):

Line 7c — Good-faith agreement.   An allocation can be made under a good-faith agreement. This is a written agreement between you and at least two-thirds of the employees of each occupational category of employees who receive tips (e.g., waitstaff, bussers, and maitre d's) working in the establishment when the agreement is adopted. The agreement must:

Line 8 — Total number of directly tipped employees.   Enter the total number of directly tipped employees who worked at the establishment during 2003. This is the cumulative total of all directly tipped employees who worked at the establishment at any time during the year. If you have a large turnover of directly tipped employees, this number may be large. Do not use this number to determine if you must file
Form 8027. Instead, see the Worksheet for Determining Whether To File Form 8027, on page 1.

Example for Line 7b— Gross receipts method.   A large food or beverage establishment has gross receipts for a payroll period of $100,000 and has tips reported for the payroll period of $6,200. Directly tipped employees reported $5,700, while indirectly tipped employees reported $500.

Once you have completed the worksheet:   

  

  Another quick method to determine if your employees are properly reporting all of their tips to you is to compare the rate of tips reported on credit sales to the rate of tips reported on cash sales. For example, if line 3 in the worksheet above greatly exceeds the rate determined from dividing reported cash tips by reportable cash receipts (i.e., total cash receipts less nonallocable cash receipts), some of your employees may not be reporting all of their tips to you and you generally should be showing an amount on line 7 (“Allocation of tips”) of Form 8027.

If it appears that not all tips are being reported to you, the IRS offers a service called the Tip Rate Determination & Education Program. This program can assist you, the employer, in implementing more effective methods of tip income reporting. The program also offers assistance in educating tipped employees concerning their obligations relating to the reporting of any tip income they receive. To find out more about this program or to identify the IRS Tip Coordinator for your state, call 1-800-829-1040 or visit the IRS Web Site at www.irs.gov and search for “Voluntary Compliance Agreements.”