Page 158 - Essentials of Payroll: Management and Accounting

Compensation
later than February 28 of each year following the reporting calendar
year. This form is used by large eating establishments to report tips
earned by employees. If an employer runs multiple eating establish-
ments, a separate form must be completed for each one. The form is

not used to submit any taxes, but rather to give the IRS an idea of the
amount of employee tip income as a proportion of total receipts for an
establishment. A sample Form 8027 is shown in Exhibit 5.3.
What the IRS is trying to determine with this form is whether an
establishment’s tipped employees are failing to report some portion of
their tip income to the business.To do this, lines 1 and 2 of the form are
used to determine the proportion of tips that customers are charging

through their credit cards, which can be easily proven by a review of the
underlying charge receipts. This proportion is then compared to the
proportion of actual total receipts reported to the business by its
employees to the total amount of gross receipts for the business. Ideally,
the two percentages should match. If the latter percentage is lower, this
indicates that employees are not reporting all of their tip income. If this
appears to be a problem, the business owner can call the IRS at 800-
829-1040 or search for “Voluntary Compliance Agreements” on the
IRS web site at www.irs.gov. This program gives assistance in educating

employees about their obligations in reporting tip income.

The 1099 Form
The 1099 form is issued to all suppliers to whom a business pays (to
quote the IRS):

...at least $600 in rents,services (including parts and materials),
prizes and awards, other income payments, medical and health
care payments, crop insurance proceeds, cash payments for fish
(or other aquatic life)...

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