Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, is the yearly tip report a sit-down restaurant files once it passes the IRS’s 10-employee test. It reports food and beverage sales and the tips employees reported, and it checks one number: whether reported tips reach 8 percent of sales. If they don’t, the difference is allocated to tipped employees and shows up on their W-2s.
This guide covers the long-tail questions the IRS page doesn’t answer quickly: who has to file, how the 10-employee test is counted, how allocation works, the deadlines and penalties, and where the numbers come from in your POS. The rules quoted are from the 2025 Instructions for Form 8027.
Who must file Form 8027?
You file for each large food or beverage establishment. All four of these have to be true:
| Test | What it means |
|---|---|
| Location | The business is in the 50 states or Washington, D.C. |
| Eaten on site | Food or beverages are provided for consumption on the premises. Fast-food operations where customers order at a counter and carry the food away don’t count |
| Tipping is customary | Not cafeteria-style operations, and not places where at least 95% of sales (other than carryout) carry a service charge of 10% or more |
| More than 10 employees | The employer normally had more than 10 employees on a typical business day in the prior calendar year (the 10-employee test, below) |
Full-service restaurants, bars, and cafés with table service usually meet the first three. The 10-employee test decides the rest.
How does the 10-employee test work?
It counts employee hours, not people. The worksheet in the instructions works like this, using last year’s numbers:
- Find the month with the highest food and beverage sales. Divide total employee hours that month by the number of days you were open.
- Do the same for the month with the lowest sales.
- Average the two daily figures. If the average is more than 80 hours, you meet the test. Eighty hours is 10 employees working 8-hour days.
A worked example with hypothetical numbers:
| Month (prior year) | Employee hours | Days open | Average hours per day |
|---|---|---|---|
| Busiest: December | 3,900 | 30 | 130 |
| Slowest: August | 2,400 | 30 | 80 |
| Average of the two | 105, which is more than 80, so you must file |
A restaurant with 12 people on the schedule can fall under the line if most shifts are short, and one with 9 full-timers and a manager working doubles can go over it. Run the numbers from payroll hours rather than guessing from headcount.
How does the 8 percent rule work?
Line 6 of the form is 8 percent of your food and beverage gross receipts (line 5). Compare it to total tips reported by employees (line 4c).
- If reported tips are at least 8 percent, there’s nothing to allocate.
- If reported tips are less than 8 percent, you allocate the shortfall (line 7) among directly tipped employees, such as servers and bartenders, whose reported tips are below their share. Indirectly tipped staff, such as bussers who get tip-outs, aren’t allocated tips.
Example, hypothetical: food and beverage sales of $1,500,000 make line 6 $120,000. Employees reported $105,000 in tips, so $15,000 is allocated among directly tipped employees.
Allocated tips go in box 8 of each employee’s W-2. You don’t withhold tax on them, and they aren’t included in boxes 1, 3, 5 or 7. They tell the employee, and the IRS, that reported tips look low.
An employer or a majority of directly tipped employees can ask the IRS for a lower rate, but never below 2 percent. The petition needs records showing customers really tip less.
Which allocation method can you use?
| Method | Who can use it | How it splits the shortfall |
|---|---|---|
| Gross receipts | Any establishment (the default) | By each employee’s share of the gross receipts they served |
| Hours worked | Establishments with fewer than the equivalent of 25 full-time employees: average employee hours under 200 per business day | By each directly tipped employee’s share of hours worked |
| Good-faith agreement | Any establishment with a written agreement signed by at least two-thirds of the tipped employees in each occupational category | However the agreement says, if it’s made in good faith |
The hours-worked method is easier to run from payroll. Gross receipts needs sales by server, which most POS systems can report.
When is Form 8027 due?
| Filing | Tax year 2025 (filed in 2026) | Tax year 2026 (filed in 2027) |
|---|---|---|
| On paper | March 2, 2026 | March 1, 2027 |
| Electronically | March 31, 2026 | March 31, 2027 |
The normal paper deadline is the last day of February, which moves to the next business day when it falls on a weekend: February 28, 2027 is a Sunday. The 2026 dates come from the 2025 instructions. The 2027 dates apply the same rules; confirm them against the 2026 instructions when they’re out.
Most restaurants must e-file. The instructions say that if you’re required to file 10 or more information returns during the year, you must file electronically. A restaurant big enough to need Form 8027 is usually issuing well over 10 W-2s, so plan on March 31. You can ask for more time on Form 8809, filed by the due date. For every other federal date, see small business tax deadlines for 2027.
What are the penalties for not filing Form 8027?
The instructions say a penalty applies for not filing on time, or not filing a correct return, unless you have reasonable cause. They point to the General Instructions for Certain Information Returns for amounts. For returns due in 2026, those amounts are:
| When the correct return is filed | Penalty per return |
|---|---|
| Within 30 days of the due date | $60 |
| More than 30 days late, by August 1 | $130 |
| After August 1, or not at all | $340 |
| Intentional disregard | At least $680, no maximum |
Missing allocated tips on W-2s is a separate problem: the instructions also name failing to furnish correct W-2s as a penalty. Penalty amounts are adjusted for inflation each year.
How do POS reports feed Form 8027?
Most of the form comes straight from POS and payroll reports. Toast, for example, publishes where to find each Form 8027 figure in its reports.
| Form 8027 line | What it is | Where it usually comes from |
|---|---|---|
| Line 1 | Total charged tips for the year | POS tip summary for card payments, excluding service charges |
| Line 2 | Total charge receipts that had charged tips | POS payments report, card sales with a tip |
| Line 4c | Total tips reported by employees | Payroll: reported cash tips plus charged tips |
| Line 5 | Gross receipts from food and beverage operations | POS sales summary, food and beverage sales |
| Line 6 | 8% of line 5 (or the approved lower rate) | Calculated |
| Line 7 | Allocated tips, if line 6 is more than line 4c | Calculated, then allocated by employee |
Two checks before you file. First, charged tips in the POS should match tips paid out through payroll; if Tips Payable in the books doesn’t clear each month, the two won’t agree. Second, keep service charges out of tips. A mandatory charge is a service charge, not a tip, and service charges paid to staff are wages. Clean monthly books, with tips recorded as a liability as described in how to set up restaurant books, make Form 8027 a reporting exercise instead of a reconstruction.
The same tip records also support the FICA tip credit, which pays back much of the employer payroll tax on tips.
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