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Tip Allocation Report

Overview

Certain large food or beverage establishments (with more than 10 employees on a typical business day) are required to make annual reports to the IRS using Form 8027 on receipts from food or beverage operations and tips to their employees. See IRS Instructions for Form 8027 for complete details.

Accessing the Report

From the Payroll Functions menu, select a client with tip reporting, then click Reports > Tip Allocation.

Allocation Methods

ProPay supports three IRS-approved methods for allocating tips:

Hours Worked Method

ProPay can calculate allocated tips to each employee based on the hours worked method. According to Form 8027 instructions, this method may be used for establishments with generally less than the equivalent of 25 full-time employees during a payroll period. See IRS Instructions for Form 8027 for complete details.

ProPay automatically computes the amount of allocated tips using this method, and that amount will show on the employee's W-2 form.

Gross Receipts Method

If the employer must use the gross receipts method, the employer must track the establishment's sales attributable to each directly tipped employee. The allocated tips amount is computed based on the ratio of that employee's sales compared to the total sales. See IRS Instructions for Form 8027 for complete details.

Note: Calculations using this method must be made outside of ProPay. The calculated amount can then be entered using the Edit Tip Allocation Database. That amount will show on the employee's W-2 form.

Good Faith Agreement Method

This is a written agreement between the employer and at least two-thirds of the employees who receive tips. It provides an acceptable method of allocating tips. See IRS Instructions for Form 8027 for complete details.

Note: Calculations using this method must be made outside of ProPay. The calculated amount can then be entered using the Edit Tip Allocation Database. That amount will show on the employee's W-2 form.

Step-by-step Instructions

Step 1: Calculate Total Hours/Units

Calculate total hours/units for each employee. This function must be run first. This also computes hours for certain tipped employees who may be salaried.

Step 2: Print Client Input Form

Print the client input form and send (or fax) it to the employer for review and approval of which employees will be subject to tip allocation. When this form is returned from the client, go to Edit Tip Allocation Database and enter (T)rue or (F)alse for each employee who will be subject to tip allocation.

Step 3: Calculate and Print Tip Allocation Report

  1. Enter the amount of gross sales for the year
  2. Be sure to deduct certain sales that are not subject to tipping, such as food to go or other sales of similar nature
  3. Click Allocate Tips to Employees
  4. Preview and print the tip allocation report

This report must be sent (or faxed) to the employer for their approval and signature on the form. Some employees may feel later that the amount allocated to them was unfair for various reasons. These situations may arise when the employee is ready to file their income tax and the amount of taxes due is more than they had anticipated.

Clear Out Allocated Tips

Use this button if you want to clear out all fields of allocated tips and start over again.

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