1099 Tax Software Blog

You can paper file Form 8027 and its Form 8027-T or transmittal summary to the IRS.  You would print Form 8027 with black ink on plain paper and mail to

Department of the Treasury
Internal Revenue Service
Cincinnati, OH 45999

But there are benefits to efiling which we list below:

1. Additional Time. You have to paper file by the end of February or electronically file by the end of March (early April). You can also efile for a 1-month extension giving transmitters until the end of April to efile.
2. Replacements/Corrections.  Your data must be perfect; the calculations must be complete and correct.  If you file electronically and you make a mistake, the IRS will return the file as BAD and you submit a replacement.  Our software and technical support will also help you detect errors before you submit.  If you file electronically and the file status is GOOD but you later realize you submitted erroneous data to the IRS, then you can submit a correction online.  Its quick and easy to do.

   If you mail paper 8027 forms with errors, the IRS will reject the forms and mail you a letter letting you know that the forms had errors and ask you to resubmit.

3. Receipt/Proof of Submission.  The IRS will post online a receipt showing when you transmitted your data and the file status.  If the file is GOOD, your done and the receipt is your proof that you submitted the data on time and successfully.

You can submit as many test files as you like.  But there is no requirement to submit a test.  Testing typically starts in mid-November and runs until mid-February.  The testing link is

fire.test.irs.gov

You can login and check the status of your file. The following results will be displayed:

“Good, Federal Reporting” — The test file is good for federal reporting.
“Bad” — The test file contains errors. Click on the filename for a list of the errors.
“Not Yet Processed” — The file has been received, but results are not available.

We, as software vendors, submit a tremendous number of test files each year with known errors and then we build-in the IRS error warnings into the software.

A TCC number is a transmitter control code. Its a five-character alpha/numeric code assigned to you by Technical Services Operation (or TSO) of the IRS.  Its free to get a TCC number but takes time.  The application is IRS Form 4419 which can be found here:

https://www.irs.gov/pub/irs-pdf/f4419.pdf

Fill out that form and fax it to 877-477-0572 if you are within the US or 304-579-4105 if you are from outside the US.  Don’t mail the form because mail is slow and it takes up to 45 days to receive a TCC number.

You only need one TCC number to efile for as many establishments you like.  You use that same TCC number year after year; you dont have to reapply for a TCC number.

You download and install the software to your computer.  You can download the software using this link:

https://www.1099fire.com/try_now.htm

Once installed, the software will display a 6-digit User ID and is looking for a passcode.

If you order the 8027 software online, our shopping cart will provide a passcode to activate the software at anytime of the day or night.  You can order online using this link:

https://www.1099fire.com/software/8027.htm

Or you can order the 8027 software by phone at (480) 460-9311 and our sales staff will provide a passcode to activate your software.

You can order online through our secure shopping cart.  The link is here

https://www.1099fire.com/software/8027.htm

You can order the software and import, print, paper or electronically file Form 8027 to the IRS on your own.  Or you can order the outsourcing service and you send us your data in excel.  We will import, convert to PDF for you to review, and if approved, we will transmit your data to the IRS using our TCC number and forward you the results when they arrive.

You can also order by phone.  Sales can be reached at (480) 460-9311.

Publication 1239 says:

Allowable characters are alphas, numerics, and blanks.

What this means is that characters such as ! or & or # or * or () or even commas, periods or hyphens are illegal characters. Lets consider some examples.

1. Espresso Café, LLC.

   Characters with an accent or tilde look cool but are not allowable when you paper or electronically file Form 8027 to the IRS.  The é in this example has to be replaced with a plan e.  The comma and period also has to be removed.  An allowable name would be ‘Espresso Cafe LLC’.

2. O’Reilly’s Bar & Grill
   123 N. Wisconsin Avenue, #230

   The apostrophe, ampersand and pound sign are not allowed in the establishment name or address.  The # sign can be replaced with the text ‘suite’.  The apostrophe and ampersand would need to be removed.  An allowable name would be:

   OReillys Bar Grill
   123 N Wisconsin Avenue Suite 230

The only allowable characters are A-Z (in upper or lower case), 0-9 and blanks.

Food and beverage establishments with employees who customarily receive tips can claim a ‘tip credit’ against Social Security and Medicare (FICA) tax payments made on behalf of employees.  Using Form 8846, the employer could list tip amounts, and claim a credit for employee tip income that exceeded the minimum wage for that locale.  For example, if there were an amount of $250 that exceeded the calculated minimum wage for hours worked, then the FICA tip credit would be $250 x 7.65% or $19.12 for the pay period.  This can add up significantly for an employer with many staff receiving tips, but even so many employers fail to take the credit each year.

The rationale behind this credit is that the employer did not receive any accrued benefit from the tips, and also did not make the decision on how much to tip an employee for each meal.  Therefore, their employer FICA payment responsibility only extended to the minimum wage equivalent, and no more.  However, automatic gratuities are set by each employer for their business, and that difference has brought about a rule change from the IRS.

Automatic Gratuities No Longer Are Included on Form 8846

A new rule from the IRS that classifies automatic gratuities on large parties will affect this tip credit.  Those automatic gratuities are now classified as “service charges” as discussed in this article: (LINK TO FIRST ARTICLE ON AUTO GRATS).   Service charges are now no longer classifieds as tip income and instead are included as regular wages, and cannot be claimed for the tip credit along with normal gratuities.  Obviously, this directly affects the amount of taxes employers pay each year, since the credit will be reduced.

One effect of this new rule will be to raise the amounts of FICA paid by employers for Social Security and Medicare.  Those employers who received a FICA Tip Credit to offset their portion of FICA payments, will now be paying additional FICA on any automatic gratuities, even if the amounts exceed the minimum wage.  This effectively raises their tax burden in addition to the increase in wages that would need to be paid.

The only way to avoid this rule change is to eliminate automatic gratuities for large parties, and instead allow customers to tip a “suggested amount”.  It is unclear why the IRS implemented this rule change with regard to automatic gratuities, except for the reason that those amounts were being fixed by the employer as part of employee compensation.  In any case, the rule is forcing some food and beverage establishments to change their policies on automatic gratuities, which may be more of a burden for employees who will not be assured of a fixed percentage tip on large parties.

In January of this year, the IRS changed a long-standing rule on automatic gratuities in restaurants for large parties.  Typically for parties of 6 or more guests, a restaurant will charge an automatic 18 to 20 percent to make sure that the gratuity is adequate to compensate the server.  These automatic tips have always been viewed for tax purposes the same as any tips for wage and tax purposes.  Any food and beverage employer with more than 10 employees reports all tips on Form 8027 each year.  The new IRS rule now includes these large party gratuities as “service charges”, classifying them as simple wages rather than tips, affecting reporting for both the employee and employer.

Service Charges as Regular Wages and Not Tip Income

Historically, tip income is used to offset the amount of minimum wage paid to employees.  Since the automatic gratuities will now be seen as service charges, that means that employers will not get a “tip credit” for those amounts to offset minimum wages paid to wait staff.  This could raise their labor costs by requiring more wages to be paid to staff, even while the employee receives the same amount of tips.  Another employer burden is where a single waitperson serves both large and small parties in the same shift.  In that case, the tips received would have to be allocated based on party size, as well as the hourly rate paid to the employee.  The only real solution would be to designate some wait staff as “only large party” employees for the shift.

Reporting Automatic Gratuities as Service Charges

The employer reports tip income on Form 8027, based on all cash tips disclosed by the employee, as well as those on credit slips.  The automatic gratuity “service charge” would now be reported as wages only and not included on Form 8027.  The service charges would now be reported on Form W-2 as regular wages to the employee.  This removes the automatic gratuities from the 8% computation of allocated tips on Form 8027 based on gross receipts, which is the IRS baseline to make sure that all tip income is reported and taxed.  This is a complex computation made more so by the new rule on automatic gratuities.

The approach by many restaurants to this new rule has been to eliminate the automatic gratuity on large parties, and only “suggest” tip amounts to customers.  While this seems to eliminate the tax and reporting burden, it does place the wait staff at risk of receiving lower gratuities from customers who are no longer bound by mandatory tip amounts.

If it weren’t for cash tips, many restaurant and bar employees would have trouble making ends meet. As for any other type of income, the Internal Revenue Service wants its cut. This means that all employees who receive $20 or more a month in tips must report all of the tip money to their employers. Employers report these tips through IRS Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.

Requirement to File

You will file Form 8027 if you own a large food or beverage establishment. If you own more than one establishment, you’ll have to file a separate form for each one, even if they operate in the same building. If you have to file multiple 8027s, then you’ll also have to file a copy of Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips.

How do you know whether your food or beverage establishment falls under the filing requirements? Here are the applicable rules:

Your business serves food and/or beverages that is consumed at the establishment

Customers normally tip for service

On a typical business day, you employ more than 10 employees who work more than 80 hours

If that last requirement has you scratching your head, all you must do is figure the average number of employee hours worked on a typical business day within your busiest and least busy months of the year. Divide that by the number of days opened during those two months, and if the result is greater than 80 hours, then the rule applies to you. If your establishment is new, use two consecutive months to figure the average hours.

When you figure the number of employees, include those that don’t receive tips, such as cooks and cashiers. By the way, you can use online software to help you figure your employees, prepare your Form 8027 and file it for you electronically. The software can import external Excel or CSV data, and the provider will even prepare the form for you.

Avoid Penalties

You must file your Form 8027 by the end of February, but if you file electronically, you have until the end of March. If you need an extension of time, file Form 8809.

You must allocate tips to employees that receive tips if your reported tips are less than a certain percentage (usually 8 percent) of your gross receipts for the month. You must also supply a Form W-2, Wage and Tax Statement, to each employee who receives allocated tips. The form must include the amount of tip money allocated to the employee.

Failure to file Form 8027 and W-2s in a timely manner can result in IRS penalties.

The last episode of Season 4 for Kitchen Nightmares featured Amy’s Baking Company in Scottsdale, Arizona.  It was a cringworthy Kitchen Nightmare as owners Amy and Samy Bouzaglo did everything that you would NOT expect a restaurant owner to do including taking tips from wait staff.

Their actions beg the question: Is it legal for an employer to take tips from an employee and in turn pay them a wage?  The answer is no.  See Fact Sheet #15 from the Department of Labor at this link:

http://www.dol.gov/whd/regs/compliance/whdfs15.pdf

To quote:

“Retention of Tips: A tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit. The Fair Labor Standards Act (FLSA) prohibits any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. For example, even where a tipped employee receives at least [minimum wage] directly from the employer, the employee may not be required to turn over his or her tips to the employer.”

In the case of Amy’s Baking Company, the owners were absolutely wrong in taking the tips from employees.  They stated that they were justified in taking the tips for two (2) reasons:

1. They earned it by helping wait the tables.  Let’s say the owner truly does work along side of the service employees.  Can they at least share in the tips and take a percentage?  The answer is no.

To quote again:

“The FLSA prohibits any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer.”

2. They pay minimum wage.  Again no.

Tips belong to the employee, not the employer.  The owners of Amys Baking Company were completely out of line both on the show and on facebook when they said:

“We do not, nor have we ever stolen or taken any of our servers ,waitresses, or waiters tips at Amy’s Baking Company.

We pay our staff members anywhere between $8.00 to $14.00 per hour to ensure that at the end of the week regardless of it being busy or not, that they go home with money and a well paid paycheck. As do many other restaurants.

They are aware of this when they are hired.

I would challenge any of our employees past or present to come forward with proof that we have ever done such a horrible thing.”

An employer can’t take an employees tips.  They can use the tip as a credit against the employer’s minimum wage obligation, but they can’t take it from the employee.

An employer who operates a large food or beverage establishment must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.  It is the employer’s responsibility of large food or beverage statements to track employee tip income and report that money to the IRS.

 About 1099FIRE:

1099FIRE is dedicated to providing feature-rich IRS Form 8027 Software, Employer’s Annual Information Return of Tip Income and Allocated Tips. Import, print and eFile IRS Form 8027  the quick and easy way!