1. You are required to gather employees' tip reports. The IRS requires any employee who receives more than $20 per month in tips to report those tips to his or her employer at least once a month. Tip reports are due to employers by no later than the 10th of the month for the previous month's tips. Employers can require reports even more frequently, such as at the end of every shift, every day, or every week. The IRS requires specific information in tip reports. (See "Resources" box on page 23.)

2. You must report your employees' tips to the IRS and withhold taxes. Employers must pay the employer's share of payroll taxes on tips, plus withhold all required income and FICA and other payroll taxes on wages and reported tips from wages actually paid the employee.

At the end of each year, employers must total each employee's reported tips for the year and record the amount on the employee's W-2 form as "wages," along with cash wages. In some cases, employers will also be required to "allocate" tips to certain employees on employees' W-2 forms if they have not reported a sufficient amount of tips (see #3 below).

3. Employers who meet three criteria must file Form 8027 (Employer's Annual Information Return of Tip Income and Allocated Tips) with the IRS each February, and in some cases must "allocate" tips. You must file the form if tipping is customary in your establishment; if you serve food and drink for on-premise consumption; and you employ more than 10 employees or their equivalent (more than 80 employee hours) on a typical day. On this form, you report annual totals for your restaurant's sales, charge card sales, charge card tips, and reported tips.

4. If you file Form 8027 and the total tips your employees report for the pay period or the year don't add up to 8 percent of your restaurant's sales, you must also go through what's called "tip allocation." This process • which points the IRS toward restaurants where employees may not be reporting all their tips • requires you to "allocate" tips to any directly tipped employees who reported tips of less than 8 percent of his or her sales. You do not withhold taxes on allocated tips. You simply show total allocated tips on your Form 8027, and note the allocations to specific employees on their W-2 Forms. Allocation can get complicated: Check the Form 8027 (described in #3) or the National Restaurant Association's Tip Reporting Educa-tion Kit for details.

Resources

• IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, contains a form employees can use. To download the publication in English (PDF) or Spanish (PDF) visit www.restaurant.org/legal/tips/resources.cfm and go to the section on IRS Tip Reporting Resources.