The deadline for filing Form 8027—the annual tip-reporting form required by the Internal Revenue Service (IRS)—is February 28. The National Restaurant Association has assembled a team of experts to assist restaurateurs in compiling their tax information in preparation for this important deadline and to help clarify any other tip-related questions.

The Association understands the importance of this issue, and has put considerable money and lobbying muscle behind its fight against unfair tip-related policies practiced by the IRS. On February 1, 2002, the Association announced that it would contribute $100,000 from the Save American Free Enterprise Fund (SAFE) to help San Francisco’s Fior d’Italia continue its battle against the IRS before the U.S. Supreme Court. (Read the press release.)

Offering operators access to a panel of experts further conveys the Association’s commitment to helping restaurateurs navigate the often-confusing maze of tip-related red tape. Our panel of experts includes Kathleen J. O’Leary, director of tax policy for the National Restaurant Association; Peter G. Kilgore, the Association’s general counsel and senior vice president of operations; and James H. Kapolas, a certified payroll professional and co-founder of Restaurant Services and RPS/Related Payroll Services, which is now a part of Advantage Payroll Services. These three experts will take questions and post answers throughout the week of February 11-February 15.

Disclaimer: The answers given here are not intended to be a complete legal examination of the question. This should not take the place of legal counsel Links to further information are provided in some cases but the National Restaurant Association takes no responsibility for the accuracy or content of such links.

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Traverse City, Mich.: If I set an automatic gratuity charge for parties of 10 and above, do my servers report that as tip income?

PANEL: No. If you set the amount of the gratuity, the money is considered corporate income for the establishment; it is not considered as tips for employees. By law, a "tip" is deemed to be a gift from the customer to the server--whether a customer gives a tip and the amount of the tip is at the discretion of the customer. If the tip is set by the establishment, that discretion is no longer there. Consequently, you have the right to give all, some or none of the so-called "gratuity" to your servers. Whatever you give to your servers must be treated as wages, not tip income, for tax purposes.

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Milwaukee, Wisc.: I do not have any full-time waitstaff, in fact, we only have four full-time employees. Do I still have to file the 8027?

PANEL: We cannot tell you whether or not your particular operation would fall under this requirement because we do not know the specifics about your business. But in general, according to the IRS instruction's for the 8027 tip-reporting form, an establishment must file an 8027 if it serves food or beverages on the premises, tipping is customary and it has more than 10 employees--including both tipped and nontipped employees--and those employees work together more than 80 hours combined on a typical day. In addition, the 8027 doesn't differentiate between part-time and full-time employees. For example, if you have 15 employees who work a combined total of more than 80 hours in a day, you must file Form 8027. Check our Tip-Reporting Basics for more information on the 8027 and other employer responsibilities related to tip reporting.

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New York, N.Y.: What--if any--are the responsibilities with regards to the Fair Labor Standards Act (FLSA) for payment of sick and vacation time for tipped employees?

PANEL: Neither sick nor vacation time is a required benefit by law. If an employer decides to provide such benefits, coverage--including which employees qualify--depends on the specific policy the employer sets up. Of course, federal law, such as Family Medical Leave Act (FMLA), applies to all employees who meet the threshold requirements under the Act--tipped or otherwise.

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Charlottesville, Va.: Will signing a TRAC agreement guarantee that my restaurant won't be audited by the IRS?

PANEL: Signing TRAC and Em-TRAC agreements does not protect your establishment from an audit and assessment on unreported tips. The agreements protect your establishment from "employer-only" assessment, but the IRS could still conduct an employer and employee audit and then assess an employer for unreported tips.

As part of the "employer-only" protection, establishments must comply with certain record-keeping requirements and employee tip-reporting educational requirements. Please read the documents carefully. Also, keep in mind that you always have the option of canceling the TRAC agreement by giving the IRS sufficient notice. You can find out more about IRS tip agreements in Restaurant.org's Law Library. The National Restaurant Association is happy to provide more detailed information about tip reporting to Association members. If you are a member, contact Peter Kilgore at pkilgore@dineout.org, or Kathleen O'Leary at koleary@dineout.org. If you are not a member, get more information about joining the National Restaurant Association.

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Vineland, N.J.: I just got a letter from the IRS asking me to sign the TRAC, Tip Reporting Alternative Commitment. Should I sign it?

PANEL: To sign or not to sign--that is a good question. Generally, each restaurant or company must decide what is best for their establishment. There are many factors that go into determining whether to sign a tip-reporting alternative commitment agreement, or the new EmTRAC, which allows employers to design their own agreement. (You can read more about the EmTRAC and TRAC agreements on our Web site.)

For example, if your establishment has failed to file the IRS tip-reporting form 8027 each year, this would likely expose you to an audit for unreported tips. Even if you've filed the form each year, if it shows tip-reporting errors (for example, all tips reported at the same amount like 8 percent, or a significant difference between the reported credit card versus cash tips, say for 2000, 15 percent credit-card versus 7 percent cash tip reporting), this could similarly trigger an audit for unreported tips. Under such circumstances, signing an agreement would protect tthe restaurant from a quick "employer-only" assessment.

Probably, the most appealing reason for signing a tip-reporting agreement is to protect your establishment from an "employer-only" audit/assessment on unreported tips. If you sign an agreement and comply with it, the IRS cannot assess you for unreported tips without first auditing the employees who under-reported.

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Utica, Mich.: Is it legal to require waitstaff to tip out to other staff members, for example, buser, barback, etc.?

PANEL: The answer to your question is a qualified "yes." The U.S. Department of Labor (DOL) states in its Field Operations Handbook that as long as the employer-required tip-pooling arrangement meets DOL guidelines, it is not necessary that the pooling be voluntarily consented to by your waitstaff. With more detailed information about your particular situation, we might be able to give you a more definitive answer.

The DOL specifies that tip pooling may only be required among employees who "customarily and regularly receive tips." Those employees--as defined by the DOL--include waitstaff, buspersons, service bartenders and counter personnel who serve customers. It typically does not include dishwashers, chefs, cooks, host/hostesses, etc. But whether or not these typically excluded workers would fall under this requirement would depend on whether such employees usually share in tips in a similar type restaurant in your area. If your restaurant tips out to more nontraditional types of employees, you can contact us directly and we can try to better advise you.

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Troy, Mich.: Is it legal to increase a server's declared tips in order to meet the legal minimum requirement?

Annapolis, Md.: What does the 8 percent minimum mean with regard to tip reporting?

PANEL: Good questions. If servers are not reporting an average of 8 percent per payroll period, you must, according to IRS form 8027, allocate a tip amount of 8 percent to each server.

The 8 percent refers to an allocation required on the 8027 tip-reporting forms when the total amount of tips reported for any payroll period is less than 8 percent of total gross receipts. There is a widely held misperception that as long as employees in an establishment are reporting 8 percent neither they nor the establishment are vulnerable to an audit. THIS IS FALSE. If servers are not reporting an average of 8 percent, this triggers certain requirements for employers -- i.e., you must allocate a tip amount of 8 percent to each server. According to the IRS 8027 instruction form, that amount is generally the difference between the total tips reported by the servers and 8 percent of gross receipts. (There are exceptions to this and if you believe the 8 percent allocation amount is inaccurate for your establishment, you can contact the IRS and make your case for a lower percentage. You can find more details on the 8027 on the IRS Web site.

An example: Say your gross receipts for a payroll period are $10,000. The IRS says if tipped employees do not report tips during that payroll period at least equal to $800 (8 percent of $10,000), tip-allocation rules kick in. If your employees reported tips to you totaling $500 for this pay period, for instance, you must allocate the remaining $300 ($800 minus $500) among your employees. This amount will be included as additional income to these employees. Check the IRS 8027 Form for the rules on how to allocate tips, and to which employees.

Remember that servers are required by the IRS to report all of their tips and employers are required to pay FICA taxes on all reported tips. Lots of servers are confused about tip-reporting rules: Check out Tip-Reporting Basics in our Law Library for more details.

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Wheeling, Ill.: We are currently printing monthly TRAC reports for our employees to show them how their cash-tip percentage compares with their charge-tip percentage.

We hold a monthly Saturday-morning educational meetings for employees whose variance is greater than 5 percent. Yet we still have employees who declare 1, 2 and 3 percent cash tips to cash sales. Are there additional ways to encourage these employees to declare a more reasonable amount of cash tips?

PANEL: If the tipped employees reporting cash tips at a level of 1 to 3 percent are substantially lower than what is reported by other employees, there appears to be only two possible reasons for such variance. First, if you assume they are reporting all tips, it is possible they are not providing quality service and customers are reflecting that in their tips. The second possible reason is that the employees are not reporting all of their tips--not withstanding what the law requires and your employment policy that all tips must be reported. If you believe they are underreporting, you can tell them that they need to report all of their cash tips and if the reporting percentage does not substantially increase to approximate what your other employees report, they will be subject to discipline, including termination. An employer has the legal right to discipline or terminate tipped employees for either of the reasons mentioned above.

Also, there are many ways you can offer friendly reminders to your employees of their obligation to report 100 percent of their tips, such as posters, or paycheck inserts. The National Restaurant Association publishes a Tip Reporting Education Kit that can help.

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TWO QUESTIONS: A subsidiary company we own has never filed 8027, but should have. Do we just start now with the current year and go forward? And do tipped employees need to fill out Form 4070 to report tips to their employer or can their daily server report be used instead if they input their daily tip information and sign off on it?

PANEL: Your first question breaks down into two parts: should your subsidiary file Form 8027 for 2001, and should it file overdue forms for previous years. As to the first part, your subsidiary should file the 8027 by February 28, 2002, covering the 2001 taxable year. As to the subsidiary's failure to file the 8027 in previous years, while the law requires such filing, we urge that your subsidiary discuss this matter first with your accountant and attorney. Although penalities may be imposed for failure to file, the law does allow the penalities to be waived if there was "reasonable cause." To determine if this is appropriate, we suggest your subsidiary look into these matters.

As to your second question, all tippped employees need to keep a daily record of the tips they receive (cash and credit card). The IRS Form 4070-A, "Employee's Daily Record of Tips," is a form that the IRS recommends be used, however, it is not required. As long as the employee has a dialy record that shows the amount of cash and charge tips recorded from customers (or other employees in a tip-out or tip-pooling arrangement) and tips they tip out to others and their names, that is sufficient. If your "daily server report" records that information, it is acceptable.

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Eden Prairie, Minn.: Do you have any sample reports of what restaurants are using for TRAC reports? What information do you have regarding TRAC?

PANEL: Our Web site offers a wealth of information on the TRAC and EmTRAC agreements. The Association also offers a Tip Reporting Education Kit (at a discounted price for members). The kit includes helpful information for employers, employee brochures, posters and sample payroll stuffers.

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The opinions expressed by Table Talk guests do not necessarily reflect the opinion of the National Restaurant Association.