Tax Tips - Restaurant
This section provides general tax information including employee benefits and rules on reporting tip income.
Reporting Tip Income - Restaurant Tax Tips
Know the rules on reporting tip income.
Tips your employees receive from customers are generally subject to withholding. Employees are required to claim all tip income received. This includes tips you paid over to the employee for charge customers and tips the employee received directly from customers.
Employees must report tip income on Form 4070, Employee's Report of Tips to Employer, (PDF) or on a similar statement. This report is due on the 10th day of the month after the month the tips are received. This statement must be signed by the employee and must show the following:
- The employee's name, address, and SSN.
- Your name and address.
- The month or period the report covers.
- The total tips received.
No report is required from an employee for months when tips are less than $20.
Both Forms 4070 and 4070-A, Employee's Daily Record of Tips, (PDF) are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer. (PDF)
Employers must collect income tax, employee social security tax and employee Medicare tax on tips reported by employees. You can collect these taxes from an employee's wages or from other funds he or she makes available.
Allocation of Tips
As an employer, you must ensure that the total tip income reported to you during any pay period is, at a minimum, equal to 8% of your total receipts for that period.
In calculating 8% of total receipts, you do not include nonallocable receipts. Nonallocable receipts are defined as receipts for carry out sales and receipts with a service charge added of 10% or more.
When the total reported to you is less than 8%, you must allocate the difference between the actual tip income reported and 8% of gross receipts. There are three methods for allocating tip income:
- Gross Receipt Method
- Hours Worked Method
- Good Faith Agreement
Employers can request a lower rate (but not lower than 2%) for tip allocation purposes by submitting an application to the IRS. Detailed instructions for computing allocation of tips, reporting allocated tips to employees, and for requesting a lower rate can be found in the Instructions for Form 8027. (PDF)
Note: The amount shown as allocated tip income is for information purposes only. You are not required to withhold Income or Social Security taxes on the allocated tip income. The amount of tip income allocated to each employee is shown in box 8 of their Form W-2.
Tip Reporting Requirements for Employers
Employers who operate large food or beverage establishments must file Form 8027, Employer.s Annual Information Return of Tip Income and Allocated Tips (PDF) to report employee tip income. A large food or beverage establishment is defined as business where all of the following apply:
- Food or beverage is provided for consumption on the premises
- Tipping is a customary practice
- More than 10 employees, who work more than 80 hours, were normally employed on a typical business day during the preceding calendar year.
A worksheet for determining whether a business meets the criteria listed above is included in the Instructions for Form 8027.
Voluntary Compliance Agreements - Restaurant Tax Tips
New voluntary tip reporting agreements can benefit restaurant owners.
The IRS has established voluntary compliance agreements for industries, such as the restaurant industry, where tipping is customary. These agreements are designed to enhance tax compliance among tipped employees through taxpayer education, instead of through traditional enforcement actions, such as tip examinations.
Three types of tip agreements have been developed for the food and beverage industry: (download PDF files)
Comparing TRDA and TRAC Agreements
|Requires the IRS to work with the business to arrive at a tip rate for its various occupations.
Does not require that a tip rate be established but it does require the employer to:
- Establish a procedure where a directly tipped employee is provided (no less than monthly) a written statement of charged tips attributed to the employee.
- Implement a procedure for the employees to verify or correct any statement of attributed tips.
- Adopt a method where an indirectly-tipped employee reports his/her tips (no less than monthly).
Establish a procedure where a written statement is prepared and processed (no less than monthly) reflecting all cash tips attributable to sales of the directly-tipped employee.
|Requires the employee to enter into a Tipped Employee Participation Agreement (TEPA) with the employer.
||Does not require an agreement between the employee and the employer.
|Requires the employer to get 75% of the employees to sign TEPAs and report at or above the determined rate.
||Affects all (100%) employees.
|Provides that if employees fail to report at or above the determined rate, the employer will provide the names of those employees, their SSNs, job classification, sales, hours worked, and amount of tips reported.
||Provides that if the employees of a business collectively underreport their tip income, tip examinations may occur but only for those employees that underreport.
|Has no specific education requirement.
||Includes a commitment by the employer to educate and reeducate quarterly all directly and indirectly-tipped employees and new hires of their statutory requirement to report all tips to their employer.
|Participation assures the employer that prior periods will not be examined as long as participants comply with the requirements under the agreement.
The IRS developed the EmTRAC Agreement program in response to employers in the food and beverage industry who expressed an interest in designing their own TRAC programs.
EmTRAC Agreements are available to employers in the food and beverage industry whose employees receive both cash and charged tips. The EmTRAC program retains many of the provisions in the TRAC agreement including:
- The employer must establish an educational program that trains employees that the law requires them to report all their cash and charged tips to their employer.
- Education must be furnished for newly hired employees and quarterly for existing employees.
- The employer must establish tip reporting procedures under which a written or electronic statement is prepared and processed on a regular basis (no less than monthly), reflecting all tips for services attributable to each employee.
The EmTRAC program provides an employer with considerable latitude in designing its educational program and tip reporting procedures, which the employer may combine.
Employee Benefits - Restaurant Tax Tips
Ideas for incentives and benefit programs.
New Form to Help Employers Identify, Compare Costs of 401(k) Plans
Organizations representing three financial services industries have developed a fee disclosure form to help employers identify and compare the costs of sponsoring a 401(k) retirement plan.
Motivating Interest: Help Employees Achieve Career Goals
Imagine the benefits of a staff that goes that extra mile for your restaurant. Motivated employees with positive attitudes have superior work habits-which translates into happier customers and fatter profits for your bottom line.
National Restaurant Association Applauds House For Passing Pension Reform
Bill opens doors for restaurants, other small businesses, to offer employees additional benefits ...
Lending a Hand
Restaurant operators report increased retention by supporting employees' community-related interests ....
National Restaurant Association Lauds House Passage of Bill Allowing Stock Option Rights For Hourly Workers
The National Restaurant Association today lauded the U.S. House of Representatives' passage of a bipartisan bill that would allow restaurant owners to offer stock option bonuses to hourly employees.
Avoiding Problems - Restaurant
This section will assist you with selecting a recordkeeping system and choosing an accounting method, along with information on what to do if you receive a notice from the IRS.
Good record keeping of "money in" and "money out" is the first step toward the profitable management of your restaurant.
Frequently Asked Tax Questions And Answers Keyword: Tips/Allocated Tips
Who pays taxes on tips? Employers, employees or both?
Form W-2, FICA, Medicare, Tips, Employee Benefits
- As an employer, do I have any liability if my employees receive tips but don't report them to me?
You have a liability to withhold and pay Social Security and Medicare tax on your employees' reported tips, to the extent that wages or other employee funds are available.
Employees who customarily receive tips are required to report their cash tips to their employers at least monthly, if they receive $20 or more in the month. Cash tips are tips received directly in cash or by check, and charged tips.
If the employee does not report tips to you, it places you at risk of possible assessment of the employer.s share of the Social Security and Medicare taxes on the unreported tips.
If you are a large food or beverage establishment (more than 10 employees on a typical day and food or beverages consumed on the premises), you are required to allocate tips if the total tips reported to you are less than 8% of gross sales. Report the allocated amount on the employee's W-2 at the end of the year.
If the reported tips from employees are more than 8% of sales, must an employer still allocate tips to the employees?
Tip allocation is only required when the amount of tips reported by employees of a large food or beverage establishment is less than 8% (or an approved lower rate) of the gross receipts (other than nonallocatable receipts) for the given period.
If the employees are reporting more than the 8%, there would be no allocated tip amount.
The employer must still file Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips.
When an employer provides day care assistance, should the employer's contribution be reported in box 10 of Form W-2?
Yes. An employer reports dependent care assistance payments in box 10 on Form W-2.
Understanding Your IRS Notice or Letter
We realize that receiving a notice or letter from the IRS can be unnerving, but if you follow these simple steps, the process to resolving the discrepancy should be straight forward.
Do you need to see what an IRS notice or letter says, but don't have it in front of you? If you know the notice number, you can look up its purpose, basic message, possible enclosures, and other useful details. And if you have the tear-off stub from the last page, you can use the information printed on it to see some of the variable content included in that notice.
How To Identify Your Notice
The notice number prints on the top of the first page of all our notices and on the lower left-hand side of the tear-off stub included with most of them. That number identifies the message we deliver in every notice. While the contents may vary somewhat, every notice with the same number has the same basic purpose.
Understanding Your Notice or Letter
|CP or Letter Number
||Changes to Tax Return, Balance Due
||Changes to Tax Return and Earned Income Credit, Balance Due
||Changes to Tax Return, Overpayment
||Data Processing Adjustment Notice, Overpayment of $1 or more
||Data Processing Adjustment Notice, Bal Due of $5 or more, Balance Due
||Examination Adjustment Notice, Balance Due
||Estimated Tax Discrepancy, Balance Due
||Overpaid Tax Applied to Other Taxes You Owe
||Notice of Insufficient Funds
||Delinquent Return Refund Hold
|CP 90/CP 297
||Final Notice - Notice of Intent to Levy and Notice of Your Right to a Hearing
||Notice of Levy and Notice of Your Right to a Hearing
|CP 91/CP 298
||Final Notice Before Levy on Social Security Benefits
||Request for Payment or Notice of Unpaid Balance, Balance Due
||Reminder Notice - Balance Due
||Second Request Notice - Balance Due
||Final Notice - Balance Due
||Installment Agreement Reminder Notice
||Notice of Default on Installment Agreement
||Notice of Proposed Adjustment for Underpayment/Overpayment
||Collection Information Statement Requested (Form 433F/433D); Inability to Pay/Transfer
||Balance Due on Account is Paid
|Letter 668D(LP 68)
||We released the taxpayer's levy.
||Proposal to Pay Accepted
||Installment Privilege Terminated
|Letter 1058 (LT 11)
||Final Notice prior to levy; your right to a hearing
|Letter 1615 (LT 18)
||Mail us your overdue tax returns.
|Letter 1731 (LP 64)
||Please help us locate a taxpayer.
|Letter 1737 (LT 27)
||Please complete and site Form 433F, Collection Information Statement.
||Installment Agreement for Direct Debit 433-G
||Installment Agreement Reply to Taxpayer
|Letter 2050 (LT 16)
||Please call us about your overdue taxes or tax return.
||Balance Due Total to Taxpayer
||Installment Agreement for Direct Debit Revisions
||Installment Agreement Cannot be Considered
||Installment Agreement Accepted: Terms Explained
||Installment Agreement: Payroll Deduction (F2159) Incomplete
||Abatement of Penalties and Interest
||Installment Agreement Accepted - Notice of Federal Tax Lien Will be Filed
||Pre-assessed Installment Agreement
||Request for Combat Zone Service Dates
||Taxpayer Response to Reminder of Balance Due
||VRU Acceptance of Proposal to Pay (30,60,90, 120 days)
||VRU Monthly Payment Plan Confirmation
||CC IAPND Installment Agreement Confirmation
||Balance Due Explained:Tax/Interest Not Paid
||Revision to Installment Agreement
||Installment Agreement Accepted: Terms Explained
|Letter 3228 (LT 39)
|Letter 4903 (LT 26)
||We have no record of receiving your tax returns.
|Letter LP 47
||Address Information Request
|Letter LP 59
||Please contact us about the taxpayer levy.
What If My Notice Isn't Listed
You'll find useful information here about many of the notices we send, including the purpose of the notice, the reason we send it, and a list of enclosures we might include with it. There's also sample content for each. Since parts of our notices vary depending on account conditions, the samples may not exactly match the notices we mail. The basic message, though, will be the same.
- Individual Filer Notices
Notices we send about Form 1040, 1040A, or 1040EZ, or any schedules, forms, or attachments included with it are Individual Filer Notice.
- Business Filer Notices
Notices we send about business-related tax forms such as Forms 941, 1065, and 1120, are Business Filer Notices.
What To Do When You Disagree
If your notice or letter is listed above, follow the link for advice on handling disagreements with the notice. In general though, you need to contact IRS at the contact number provided on the notice to explain why you disagree. If that doesn't result in your satisfaction, the Taxpayer Advocate may be able to assist
Restaurant Industry: Facts, Figures & Closed Cases
Criminal Investigation has investigated a number of employers within the Restaurant Industry who have been found guilty of various types of tax evasion schemes, including employment tax fraud. This fact sheet outlines the different schemes and briefly summarizes examples of fraud investigations.
IRS special agents have investigated and recommended to the Department of Justice for prosecution a number of business people in the restaurant industry.
Criminal cases in this industry typically involve tax evasion, money laundering and employment tax fraud. And, special agents often find the following illegal activities committed in the restaurant industry:
Deliberately underreporting or omitting income
Overstating the amount of deductions
Keeping two sets of books
Making false entries in books and records
Claiming personal expenses as business expenses
Claiming false deductions
Failing to forward withheld employment taxes to the IRS
Hiding or transferring assets or income
IRS Criminal Investigation
Restaurant Industry Statistics
*How to Interpret Data. Complex financial investigations may take several years to complete. As a result, a CI investigation may be initiated in one year, recommended for prosecution the next year, and convicted/acquitted in yet another year. Therefore, the data shown in cases initiated does not represent the same universe of cases shown in other actions within a given fiscal year.
**Incarceration may include prison time, halfway house, home confinement, or a combination thereof.
Tax Laws and Regulations - Restaurant
This page provides links to revenue rulings and court cases, and other regulations for the Restaurant industry.
New Smallwares Accounting Method Simplifies Recordkeeping and Allows Immediate Deduction.
A new IRS procedure allows restaurant and tavern owners to change accounting methods and expense the cost of replacement dishware, glassware and other items that previously had to be depreciated. The smallwares method of accounting allows restaurants and taverns to deduct the cost of these replacement items in the year purchased.
Generally smallwares consists of the following categories: glassware, flatware, dinnerware, pots and pans, table top items, bar supplies, food preparation utensils and tools, storage supplies, service items and small appliances costing $500 or less.
The smallwares accounting method can only be used by persons engaged in the business of operating a restaurant or tavern that prepares food and beverages. It isn't available for new business start-up purchases of smallwares and does not apply to items purchased and stored at a warehouse or location other than the restaurant or tavern where the items are used.
Supreme Court Rules on Income From Tips
The Supreme Court ruled that the IRS can use estimates of tip income from restaurant employees to calculate the employer's share of FICA taxes on cash tips.
Commissioner Rossotti issued the following statement in response to this ruling:
The Court's important decision upholds our ability to make sure all Americans pay a fair share of taxes. The IRS plans to continue working cooperatively with the Restaurant Industry and other industries where tips are common. Our goal is to create a fair, accurate system for reporting tip income while minimizing burden on taxpayers and business.
National Restaurant Association Government and Legal Affairs
Up to date information on issues that may impact the industry.
Cost Segregation Issues in the Restaurant Industry (PDF)
A field directive on the planning and examination of cost segregation issues in the restaurant industry.
Trends and Statistics - Restaurant
This section provides links to various sources that supply restaurant-related statistics and trends; as well as forecasts on economic, workforce, consumer and menu trends, and information for restaurant operators to overcome the current economic challenges and position themselves for future growth.
National Restaurant Association . Industry at a Glance
Provides quick at-a-glance macro statistics on the restaurant industry.
2009 Restaurant Industry Overview
- Sales: $566 Billion
- Locations: 945,000
- Employees: 13 million . one of the largest private-sector employers
Restaurant Industry Sales
(Billions of current dollars)
|Type of Establishment
||2009 Estimated Sales (Billions)
| Eating places
| Drinking places
| Managed services
| Lodging-place restaurants
| Retail, vending,
Restaurants . Small Businesses with a Large Impact on Our Nation.s Economy
Get more details in our 2009 Restaurant Industry Forecast
- Restaurant-industry sales are forecast to advance 2.5% in 2009 and equal 4% of the U.S. gross domestic product.
- The overall economic impact of the restaurant industry is expected to exceed $1.5 trillion in 2009.
- Every additional million dollars in restaurant sales generates an additional 33 jobs for the economy.
- Eating-and-drinking places are mostly small businesses . with 91% having fewer than 50 employees.
Cornerstone of Career Opportunities
Get more details in our 2009 Restaurant Industry Forecast
- The restaurant industry employs an estimated 13 million people, or 9% of the U.S. workforce.
- The restaurant industry is expected to add 1.8 million jobs over the next decade, with employment reaching 14.8 million by 2019.
- One-quarter of eating-and-drinking-place firms are owned by women, 15% by Asians, 8% by Hispanics and 4% by African-Americans.
- Nearly half of all adults have worked in the restaurant industry at some point during their lives, and more than one out of four adults got their first job experience in a restaurant.
Restaurants . An Essential Part of Daily Life
Get more details in our 2009 Restaurant Industry Forecast
- Restaurants will provide more than 70 billion meal and snack occasions in 2009.
- On a typical day in America in 2009, more than 130 million individuals will be foodservice patrons.
- 68% of adults said their favorite restaurant foods provide flavor and taste sensations which cannot easily be duplicated in their home kitchen.
Restaurants By the Numbers.
- $1.5 billion . Restaurant-industry sales on a typical day in 2009.
- 76 percent . Percent of adults who said they are trying to eat healthier now at restaurants than they did two years ago.
- 70 percent . Percent of adults who said they are more likely to visit a restaurant that offers locally produced food items.
- 69 percent . Percent of adults who said purchasing meals from restaurants, take-out and delivery places makes it easier for families with children to manage their day-to-day lives.
- 52 percent . Percent of adults who said they are likely to make a restaurant choice based on how much a restaurant supports charitable activities and the local community.
- 27 percent . Percent of adults who said that when it comes to choosing a restaurant, they are paying more attention to coupons and value specials than they were two years ago.
Restaurants USA Food Service Trends
According to Bureau of Labor Statistics (BLS) data, 4 percent of all employed men, 6 percent of all employed women and 20 percent of all employed teenagers worked in food-preparation and foodservice occupations in 1998. In addition, the BLS projects that the number of workers in the restaurant industry will reach 12.5 million by the year 2008.
Restaurant Industry Research
Restaurant Industry Data and Research Information.
Related Links - Restaurant
This page provides you links to sites that have specific information dealing with Restaurants.
American Culinary Federation
The American Culinary Federation, Inc., a professional, not-for-profit organization for chefs, was founded in 1929 in New York City by three chefs' organizations. Comprised of more than 25,000 members with over 300 individual ACF chapters throughout the United States and Caribbean, the ACF is the largest and oldest organization dedicated to professional chefs in the USA today.
American Institute of Wine & Food
The American Institute of Wine & Food was founded in 1981 by Julia Child, Robert Mondavi, Richard Graff and others dedicated to advancing our gastronomic heritage. The Institute's nearly 11,000 members include dedicated consumers and celebrated chefs, restauranteurs, caterers, hoteliers, authors, journalists, consumer advocates, historians, dietitians, scholars and educators.
International Hotel & Restaurant Association
The International Hotel & Restaurant Association is a global network of independent and chain operators, national associations, hospitality suppliers and educational centres in the hotel and restaurant industry. Representing over 750,000 establishments in more than 150 countries, IH&RA provides a voice at international level for an industry which comprises more than 300,000 hotels and 8 million restaurants world-wide, employs 60 million people and contributes $950 billion to the global economy.
National Restaurant Association
The National Restaurant Association is the definitive membership-based business association for the restaurant industry. With more than 37,000 members representing more than 175,000 restaurants, National Restaurant Association membership includes tableservice restaurants, quickservice outlets and cafeterias, as well as professionals and academic institutions associated with the industry.
This publication concentrates its coverage in the high value-added processed/prepared foods and beverage products sector of the $480 billion food industry in North America. Focusing on new product formulation, Prepared Foods is written exclusively for the product development team.
Nation's Restaurant News
Born in 1967 Nation's Restaurant News replaced the Chain Store Age for Fountain and Restaurant Managers magazine. With the restaurant growth explosion by now sweeping the nation, NRN dedicated itself to providing readers with the news, trends and information they needed to stay ahead. NRN-Online is the next step in NRN's continuing quest to provide the most timely and important information about the foodservice industry, which today is a $320 billion business, with no end to growth in sight.
Grocery Manufacturer's of America Association (GMA)
GMA is the world's largest association of food, beverage and consumer product companies. With U.S. sales of more than $460 billion, GMA members employ more than 2.5 million workers in all 50 states. The organization applies legal, scientific and political expertise from its member companies to vital food, nutrition and public policy issues affecting the industry.
Restaurant and Bars Forms and Publications
The links on this page provide Restaurant industry forms and publications.
Credit for Portion of Employer Social Security Paid with Respect to Employee Cash Tips (IRC 45 B Credit)
Are You Getting the Credit You Deserve? Here's a Hint.
If you are an employer in the food and beverage industry, you may be entitled to a credit for the social security and Medicare taxes you pay on your employees' tip income. This credit is available under Internal Revenue Code (IRC) section 45 B, Credit For Portion Of Employer Social Security Paid With Respect To Employee Cash Tips. You must meet both of the following requirements to qualify for the credit:
- You had employees who received tips from customers for providing, delivering, or serving food or beverages for consumption; and
- You paid or incurred employer social security and Medicare taxes on these tips.
The credit applies only to tips received by food and beverage employees. It is not applicable to other tipped employees.
The IRC section 45 B credit is available for taxes paid after December 31, 1993. The credit is available without regard to whether your employees reported the tips to you pursuant to IRC section 6053(a). You can claim or elect not to claim the credit anytime within three years from the due date of your return on either your original return or an amended return.
Minimum Wage Effect
The credit equals the social security and Medicare taxes you paid on the tips received by the employees. However, no credit is given for tips used to meet the federal minimum hourly wage rate. For example, if the minimum wage rate was $5.15 per hour, and you paid the employee $3.75 per hour and applied tips of $1.40 per hour to reach the $5.15 minimum wage, then the $1.40 per hour in tips cannot be used toward the credit. If, however, you paid each employee an amount equal to or more than the minimum wage without including tips, then you can compute the credit on all reported tips. Note: The Small Business Work Opportunity Act of 2007 froze the federal minimum wage at $5.15 per hour for computation purposes, even though it will reach $7.25 per hour by the summer of 2009.
Treatment of IRC 45B credit
The credit is part of the general business tax credit and is claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes on Certain Employee Tips. Since it is an income tax credit, claimed on an income tax return, you may use it to offset any regular income tax liability, but not employment tax liabilities. A credit is a dollar for dollar reduction of your regular tax liability, where an expense deduction only reduces your taxable income. Therefore, credits are usually more beneficial. You cannot claim both the credit AND the expense deduction. If you claim the credit, you must reduce your social security and Medicare tax deduction accordingly. You and your accountant should evaluate, annually, whether the credit or the expense deduction is more beneficial to you.
The IRC 45B credit is not refundable which means if the credit reduces your regular income tax below zero, to a negative amount, the negative amount is not sent to you as a tax refund. However, it is subject to carry back and carry forward provisions of the Internal Revenue Code, as are other components of the business tax credit. See IRC section 39. Credits arising in tax years beginning after December 31, 1997 may be carried back one year and forward 20 years. Credits arising in tax years beginning before 1998 may be carried back three years and forward 15 years. If you intend to carry back or carry forward.
Market Segment Understandings (MSU)
The MSU Program, first introduced in 1993, is a means of enhancing tax compliance while reducing taxpayer burden. This Program envisions that the IRS and taxpayers in particular market segments, work together to improve tax compliance in those areas through educational efforts and other collaborative approaches rather than through traditional audit techniques.
The IRS, in a continuing effort to increase tax compliance and at the same time reduce taxpayer burden, has expanded its MSU Program into other industries. The newest additions are new voluntary compliance agreements for all industries where tipping is customary.
These voluntary compliance agreements are designed to enhance tax compliance among tipped employees through taxpayer education instead of through traditional enforcement actions, such as tip examinations.