Industries
Restaurant bookkeeping and taxes: tips, Form 8027 and POS reconciliation
Restaurant bookkeeping built around what the IRS asks for: how to split POS sales, tips and service charges, the 20-dollar tip reporting rule, Form 8027 and the 8% allocation, the FICA tip credit and the payroll calendar.
Prepared by Aldro Accounting · Updated · Sources checked
The quick answer
Restaurant bookkeeping has to track tips and service charges separately because the IRS treats them differently: employees who get $20 or more in tips in a month must report them to the employer by the 10th of the next month, while mandatory service charges paid to staff are wages. A large food or beverage establishment, one where tipping is customary and the employer normally had more than 10 employees on a typical business day last year, also files IRS Form 8027 each year, due March 1, 2027 on paper or March 31, 2027 electronically for 2026.
Restaurant bookkeeping and tax prep in one place
Aldro is the cheapest way to get your business taxes done: $399 flat, with bookkeeping at $20 a month.
The flat yearly price covers everything tax for the year: every federal and state business return the restaurant needs, whether that is Schedule C, Form 1065, Form 1120-S or Form 1120, plus the owner's personal return when the business income goes on it. Forms 1099-NEC for contractors are included too.
Bookkeeping covers unlimited bank and card accounts, monthly reconciliation and monthly statements. Payroll processing and sales-tax filing aren't included. Our team prepares and files the returns.
The rest of this page sets out the IRS rules that shape a restaurant's books: how POS sales are split, how tips differ from service charges, and which forms are due when.
Set up POS categories the way Form 8027 counts sales
Form 8027 asks for gross receipts from food and beverages. The IRS defines these as receipts from cash sales, charge receipts, charges to a hotel room and the retail value of complimentary food or beverages served to customers. Nonallocable receipts are left out.
Nonallocable receipts are carryout sales and receipts with a service charge of 10% or more added. Carryout means food or beverages consumed off the premises. State and local taxes are not part of gross receipts, and neither are merchandise sales such as souvenirs, tee shirts or glassware.
Tips generally aren't part of gross receipts either. The exception: if cash sales were reduced by cash paid out to employees for their charged tips, those charged tips go back into gross receipts.
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| POS line | In Form 8027 gross receipts? |
|---|---|
| Dine-in food and beverage sales (cash, card, hotel room charges) | Yes |
| Complimentary food or beverages | Yes, at retail value |
| Carryout sales | No, nonallocable |
| Sales with a service charge of 10% or more | No, nonallocable |
| State or local sales tax | No |
| Merchandise (tee shirts, glassware, souvenirs) | No |
| Tips | Generally no |
So a POS set up with separate lines for dine-in food and drink, carryout, sales with a service charge, comps, merchandise, sales tax, charged tips and service charges gives the daily totals the books and Form 8027 both need.
Tips vs service charges
The IRS uses an automatic 18% charge for parties of six or more as its example. Because the customer has no unrestricted right to decide the amount, that charge is a service charge, not a tip.
Any part of a service charge distributed to an employee is wages. The employer withholds federal income tax, Social Security tax and Medicare tax and includes the amount on Form W-2 as wages. Service charges are not reported as tips on Form 8027.
Service charges also don't count for the FICA tip credit. The IRS calls distributed service charges and auto-gratuities non-tip wages and excludes them from the credit.
Employee tip reporting and payroll taxes on tips
Employees who receive $20 or more a month in cash tips must report 100% of their tips to the employer in a written report. Cash tips include tips paid by cash, check, debit card and credit card. No report is required for a month when tips are less than $20.
Each month's report is due by the 10th of the next month. When the 10th falls on a Saturday, Sunday or legal holiday, the next business day counts.
Publication 1244 was made obsolete beginning in 2024, and Forms 4070 and 4070A are historical. Employers can have employees furnish tip statements electronically and may set up an electronic tip reporting system.
The employer collects income tax and the employee's Social Security and Medicare taxes on reported tips. For 2026 the Social Security rate is 6.2% each for employer and employee on wages up to $184,500, and the Medicare rate is 1.45% each with no wage base limit.
When an employee's regular pay isn't enough to withhold all the tax on reported tips, the uncollected Social Security and Medicare tax goes in box 12 of Form W-2 with codes A and B. An employee who doesn't report tips as required may face a penalty of 50% of the Social Security and Medicare taxes owed on the unreported tips.
Form 8027 for large food or beverage establishments
Employers use Form 8027 to report receipts and tips from each large food or beverage establishment and to figure allocated tips. A large food or beverage establishment is located in the 50 states or D.C., tipping of food or beverage employees is customary there, and the employer normally employed more than 10 employees on a typical business day in the preceding calendar year.
The 10-employee test uses a worksheet of average daily employee hours. If the result is more than 80 hours, the test is met. A new operation must file if, during any 2 consecutive calendar months, all employees average more than 80 hours worked each business day.
The IRS generally doesn't consider tipping customary in a cafeteria-style operation, or where at least 95% of total sales other than carryout have a service charge of 10% or more.
If tips reported during a payroll period are less than 8% of the establishment's gross receipts, the employer must allocate the difference among the employees who receive tips. The employer, or a majority of the employees, can petition the IRS for a lower rate, but not lower than 2%.
The three allocation methods are hours worked, gross receipts and a good-faith agreement. The hours-worked method is for establishments with fewer than the equivalent of 25 full-time employees, meaning fewer than 200 employee hours per business day on average. A good-faith agreement is a written agreement with at least two-thirds of the tipped employees in each occupational category.
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| Calendar year | Paper filing | Electronic filing |
|---|---|---|
| 2025 | March 2, 2026 | March 31, 2026 |
| 2026 | March 1, 2027 | March 31, 2027 |
Allocated tips go in box 8 of each employee's Form W-2. They are not included in boxes 1, 3, 5 or 7, and the employer doesn't withhold income, Social Security or Medicare tax on them.
- Employers filing 10 or more information returns during the year must file electronically
- The FIRE system is retired. IRIS is the only system for e-filing the 2026 Form 8027
- Employers filing more than one Form 8027 on paper include transmittal Form 8027-T
- Form 8809 requests an extension of time to file
- Records that back up the return, employee statements and tip allocations are kept for 3 years after the due date
The FICA tip credit on Form 8846
Food and beverage employers with tipped employees may claim a credit for the employer share of Social Security and Medicare tax paid on certain employee tips. The IRS puts the employer share at 7.65%.
Tips used to bring an employee's pay up to $7.25 an hour, the federal minimum wage in effect on July 24, 2009, don't count. The credit is the creditable tips times 7.65%.
It is a non-refundable general business credit. Unused credit can be carried back one year or forward up to 20 years. The credit is claimed on Form 8846, and prior years can be claimed on an amended return.
The restaurant payroll and information return calendar
Form 941 is filed for each quarter by the last day of the month after the quarter ends: April 30, July 31, October 31 and January 31. Forms W-2 are filed with Form W-3 with the Social Security Administration and given to employees by January 31. Form 1099-NEC is filed with the IRS and given to recipients by January 31.
Form 940 reports federal unemployment (FUTA) wages for the prior year. If all FUTA tax was deposited on time, the employer gets 10 more calendar days to file it.
For payments made after 2025, the reporting threshold for Forms 1099-NEC and 1099-MISC rises from $600 to $2,000 in a calendar year.
For tax years beginning after 2024 and ending before 2029, employees in occupations that customarily received tips can deduct up to $25,000 of qualified tips on their own returns. Employers report cash tips and the Treasury Tipped Occupation Code on Form W-2, with IRS transition relief for 2025.
Employment tax records, including tips reported by employees and records of allocated tips, are kept for at least 4 years.
Worked example
Tip allocation: in one payroll period a restaurant has $60,000 of gross receipts after leaving out carryout sales, sales with a 10% or higher service charge, sales tax and merchandise. 8% of $60,000 is $4,800. Employees reported $3,900 in tips, so the $900 difference must be allocated among the directly tipped employees and shown in box 8 of their W-2s, with no tax withheld on it. FICA tip credit: a server works 120 hours for $4.00 an hour, or $480 in wages, and reports $1,200 in tips. At the $7.25 basis, 120 hours comes to $870, so $870 minus $480 = $390 of tips aren't creditable. Creditable tips are $1,200 minus $390 = $810, and the credit is $810 times 7.65% = $61.97. The employee's Social Security and Medicare on the $1,200 of reported tips is 7.65%, or $91.80, and the employer pays a matching $91.80.
Common questions
Which restaurants have to file Form 8027?
Employers with a large food or beverage establishment: in the 50 states or D.C., where tipping is customary, and where the employer normally had more than 10 employees on a typical business day in the prior year. The worksheet test is more than 80 average employee hours per business day.
Is an automatic gratuity a tip?
No. An automatic 18% charge for large parties is a service charge because the customer can't freely set the amount. The part paid to staff is wages, subject to income tax, Social Security and Medicare withholding, and isn't reported as tips on Form 8027.
When do restaurant employees report tips?
Employees with $20 or more in tips in a month report all of them to the employer by the 10th of the next month, or the next business day if the 10th is a weekend or legal holiday.
What happens if reported tips are under 8% of sales?
At a large food or beverage establishment, the employer allocates the shortfall among tipped employees using the hours-worked, gross receipts or good-faith agreement method. The rate can be lowered by IRS petition, but not below 2%.
How is the FICA tip credit figured?
Take the tips the employer paid FICA on, subtract the tips needed to bring pay up to $7.25 an hour, and multiply what's left by 7.65%. It is claimed on Form 8846.
Does restaurant tax preparation include payroll?
Aldro's flat yearly price covers the restaurant's business returns and Forms 1099-NEC. Payroll processing and sales-tax filing aren't included.
The cheapest way to get your business taxes done: $399 flat.
Business tax filing is $399 USD a year, and it covers everything tax for that year.
How it works
- Tell us about your business. A two-minute form. No payment is collected through it.
- Get your next steps by email. We’ll email you the next steps within one business day. After you sign up we’ll send you a secure upload link for your documents.
- We file it. Our team prepares and files your return. Add bookkeeping for $20 a month if you want it.
What's included
$399 a year covers everything tax for that tax year.
- Every business return for the year. All the federal and state or provincial business returns you need for the tax year: Schedule C, 1065, 1120-S, 1120 and their state returns in the US; T2, or T1 with T2125, in Canada.
- More than one state. Multi-state returns are included at the same price.
- Your personal return. The owner’s personal return (1040 or T1) is included when it’s needed for the business income.
- Quebec. Quebec returns (CO-17, TP-1 and TP-80) are included. Our Quebec pages are in French, and our team works with you in English.
- Extensions and reminders. Extensions (Form 7004 or 4868) and quarterly estimate reminders are included.
- Information returns. 1099-NEC, T4/T4A and T5018 slips are included in the tax price.
- City and excise returns. City and local business tax returns, and state excise returns such as Washington B&O, are included in the yearly price.
- Franchise tax reports. State franchise tax reports, such as the Texas franchise tax report, are included.
- Estimated tax and instalment amounts. We work out your quarterly estimated tax payments in the US, or your CRA instalments in Canada, and tell you what to pay and when.
- Unfiled past years. Each unfiled prior-year return is $399 per tax year, the same flat price.
- Bookkeeping at $20 a month. Unlimited bank and card accounts, monthly reconciliation and monthly statements.
Basic inventory tracking for online stores, such as Shopify, is included. Full cost-of-goods reconciliation is quoted separately. Payroll processing and sales-tax filing aren’t included in bookkeeping. Prices are in USD. Our team prepares and files your return.
Sources
- IRS: Instructions for Form 8027 (2026) · checked October 31, 2026
- IRS: Instructions for Form 8027 (2025) · checked October 31, 2026
- IRS: Publication 531, Reporting Tip Income · checked October 31, 2026
- IRS: Publication 15, Employer's Tax Guide · checked October 31, 2026
- IRS: FICA Tip Credit for employers · checked October 31, 2026
- IRS: Employment tax due dates · checked October 31, 2026
This guide explains general rules from the sources listed. It isn’t tax advice for your situation.