Form 8027 is the one IRS form that tells the government, in a single page, how your restaurant's reported tips compare to your sales. If the ratio looks low, it is the first thing an examiner reads. Owners who treat it as a box to check at the end of February are handing the IRS a roadmap without reading it themselves.
Here is how the form works, who has to file it and what the 8 percent allocation rule actually requires.
The law behind the form
IRC 6053(c) imposes special reporting on a "large food or beverage establishment." For each calendar year, the employer must report to the IRS:
- Gross receipts from food and beverages, other than nonallocable receipts.
- Total charge receipts, other than nonallocable receipts.
- Total charged tips shown on those charge receipts.
- The total of tips employees reported to you, plus service charges of less than 10 percent that you reported as wages.
- The amount allocated to each employee, if allocation is required.
That report is Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. You file one for each establishment.
Are you a large food or beverage establishment?
Under IRC 6053(c)(4), the term covers any trade or business, or part of one, that provides food or beverages, where tipping of the employees serving food or beverages is customary, and that normally employed more than 10 employees on a typical business day during the preceding calendar year. The current Instructions for Form 8027 add that the establishment must be in the 50 states or the District of Columbia and must serve food or beverages for consumption on the premises. Fast food operations are excluded.
The 10-employee test is measured in hours, not heads. The instructions include a worksheet that averages employee hours on a typical business day, and filing is required if the result is greater than 80 hours. Employees at all of your food or beverage operations are counted together for this test. The statute also says that an individual who owns 50 percent or more in value of the stock of the corporation operating the establishment is not counted as an employee.
New restaurants have their own rule. Under the instructions, a new business must file if, during any two consecutive calendar months, average daily employee hours exceed 80.
The 8 percent rule in plain English
IRC 6053(c)(3) works on a payroll-period basis. If the tips your directly and indirectly tipped employees reported for a payroll period are less than 8 percent of the establishment's gross receipts for that period (other than nonallocable receipts), you must allocate the difference among the employees who customarily receive tips.
"Nonallocable receipts" are defined in IRC 6053(c)(6): receipts from carryout sales and receipts for services where a service charge of 10 percent or more is added. Those receipts come out of the base before you apply the 8 percent.
An example. Say a payroll period's allocable gross receipts are $100,000. Eight percent is $8,000. If your tipped staff reported $6,500 in tips for that period, there is a $1,500 shortfall to allocate. If they reported $8,200, there is nothing to allocate for that period.
How allocation works
The statute gives you two paths. Under IRC 6053(c)(3)(B), you allocate either based on a good-faith agreement between you and your employees or, without an agreement, under the method in the regulations.
The current instructions describe three methods:
- Hours-worked method. Available only to establishments that employ fewer than the equivalent of 25 full-time employees during the payroll period. The statutory note to IRC 6053 confirms that limit for payroll periods beginning after December 31, 1986.
- Gross receipts method. The default. It allocates the shortfall based on each directly tipped employee's share of gross receipts.
- Good-faith agreement. A written agreement with at least two-thirds of the tipped employees in each occupational category.
Allocated tips go in box 8 of the employee's Form W-2. You do not withhold income tax, Social Security or Medicare on allocated tips. The IRS's tip guidance tells employees they generally must report allocated tips on their own return unless their records show they received less.
The statute gives employers one useful protection. Under IRC 6053(c)(5), you are not liable to anyone if an amount is improperly allocated, as long as you allocated it in accordance with the regulations.
You can ask for a lower rate
Eight percent is a ceiling on the presumption, not a law of nature. Under IRC 6053(c)(3)(C), either the employer or a majority of the employees can petition the IRS to lower the rate, but not below 2 percent, when the actual tip rate is less than 8 percent. A counter-service operation with tip jars and a high carryout share may have a real case for a lower rate.
The instructions say the petition goes to the IRS National Tip Reporting Compliance office in Grand Rapids, Michigan, not to the Form 8027 filing address. It must include the required supporting information and a statement signed under penalties of perjury, and it requires a user fee. Do not file this petition casually. You are inviting the IRS to study your tip rate. Make sure the data supports you before you ask.
Deadlines for the 2025 return
For Forms 8027 reporting calendar year 2025, the current instructions give these due dates:
| Filing method | Due date for 2025 Form 8027 |
|---|---|
| Paper | March 2, 2026 |
| Electronic | March 31, 2026 |
If you file more than one paper Form 8027, you also file Form 8027-T as a transmittal. Extensions are requested on Form 8809, and the instructions say not before January 1 of the filing year or after the due date.
Electronic filing is mandatory if you are required to file 10 or more information returns during the year, counting other information returns such as Forms W-2. Most restaurants large enough to file Form 8027 will cross that line with W-2s alone. Electronic filing goes through the IRS FIRE system.
The instructions also note that the law imposes a penalty for failing to file Form 8027 on time unless you can show reasonable cause, and that penalties can apply to incorrect Forms 8027 and W-2. Treat this return with the same care as your payroll returns.
What the form tells an examiner
Look at your own Form 8027 the way an IRS employee will. Two numbers jump out: charged tips as a percentage of charge receipts, and total reported tips as a percentage of gross receipts. If customers tipped 18 percent on card sales and your staff reported 6 percent on total sales, the gap is visible before anyone opens your books.
That gap is the raw material for the employer FICA assessments described in our guide to aggregate tip assessments. The fix is not on the Form 8027. The fix is upstream, in a tip reporting system that captures cash tips honestly and runs every reported dollar through payroll, which we cover in our guide to the owner's tip reporting duties. Restaurants that want more certainty can also consider a voluntary agreement with the IRS, discussed in our guide to TRAC, TRDA and SITCA.
Common mistakes
- Counting heads instead of hours on the 10-employee test, and concluding you do not have to file.
- Leaving carryout sales and 10-percent-plus service charges in gross receipts, which inflates the 8 percent target.
- Allocating tips to employees who do not customarily receive tips.
- Treating automatic gratuities as tips on the form while also running them through payroll as wages, or the reverse.
- Filing a Form 8027 that does not tie to the W-2s. The IRS can compare them.
If you want an attorney to look at a tip compliance problem before it becomes an assessment, the firm's small business IRS problems guide explains how it approaches these cases.
Form 8027 is a one-page summary of your tip compliance. Read it before you sign it, because the IRS will.