TaxBandits Knowledge Base

What is “Allocation of Tips” in 8027?

The allocation of tips applies when employees at an establishment report fewer tips than 8% (or a lower approved rate) of the establishment's gross receipts during a payroll period. This allocation is made to those directly tipped employees who have a "reporting shortfall," meaning their reported tips are below the required threshold based on the establishment's gross receipts. Indirectly tipped employees (such as kitchen staff or dishwashers) do not receive an allocation.

Example: Suppose you run a restaurant, and your gross receipts are $10,000 for a certain payroll period. According to the IRS, 8% of the gross receipts would be $800. If your employees report only $600 in tips for the period, there is a $200 shortfall. That $200 would then be allocated among the directly tipped employees who reported less than 8% of the total receipts as tips.