A new business is subject to TEFRA if the average number of hours worked per business day is more than 80 hours in any two consecutive months within the preceding calendar year.
Federal law requires employees who receive $20 or more in tips during a calendar month to report 100% of their tips to their employer. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) created additional tip reporting requirements for large food or beverage establishments.
TEFRA applies to establishments where:
tipping is customary
food or beverage is provided for consumption on the premises, and
the average number of hours worked by all employees on a typical business day during the preceding calendar year was at least 80.
|
|
A new business is subject to TEFRA if the average number of hours worked per business day is more than 80 hours in any two consecutive months within the preceding calendar year. |
Qualifying employers must:
file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, documenting all reported tip income and the establishment’s gross receipts. If the employer owns more than one establishment and records gross receipts separately, then Form 8027 is required for each establishment.
allocate tips among employees who receive them if the total tips reported during the payroll period are less than 8% (or a lower negotiated percentage*) of the establishments gross receipts for that period.
report any tip allocations in box 8 of employees’ Forms W-2.
retain records substantiating tip allocations for at least four years.
Failure to file Form 8027 may result in substantial penalties.
*A majority of the employees, or the employer, may apply to the appropriate Internal Revenue director to reduce the percentage of gross receipts from 8% to not lower than 2%. For more information, refer to the Instructions for Form 8027.
Employers must allocate tips among employees who receive them if the total tips reported during the payroll period is less than 8% (or a lower negotiated percentage) of the establishment’s gross receipts for that period. There are 3 methods to allocate tips:
Good Faith Agreement – This is a written agreement between the employer and at least two-thirds of the employees in each job category who receive tips (for example, wait staff, bus staff, and hostesses). Both directly tipped and indirectly tipped employees are subject to tip allocations under a good faith agreement.
IRS formula based on gross receipts – Only directly tipped employees are subject to tip allocations under this method.
IRS formula based on hours worked – Establishments may use this method if the number of employee hours worked (both tipped and non-tipped employees) is less than 200 hours per business day. Only directly tipped employees are subject to tip allocations under this method.
Employers are not required to withhold any taxes from tip allocations. It is the employee’s responsibility to include tip allocations as taxable income on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, when filing his personal income tax return. Once an allocation method is selected, it must remain in effect the entire year.
Our service calculates tip allocations based on IRS formulas, reports tip allocation totals on employee Forms W-2, and prepares Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.
Check with your state for additional restaurant payroll regulations.