Guides / Tip Allocation and Form 8027

By NorseHorse. Updated October 16, 2026. General information, not tax advice; confirm your situation with a tax professional.

An amount in box 8 of your W-2 means your employer allocated tips to you. Large restaurants and bars have to do this when the staff's reported tips add up to less than 8 percent of sales, and the gap lands on the directly tipped employees whose reports came in short. It isn't a payment from your employer. It's an estimate, and you either report it on your return or prove with records that you got less.

Which employers have to allocate

An employer that runs a large food or beverage establishment files Form 8027 each year. The place has to meet three tests:

• It serves food or drinks for consumption on the premises. Fast-food operations don't count.
• Tipping is customary. It generally isn't in a cafeteria-style operation, or where at least 95 percent of sales (other than carryout) had a service charge of 10 percent or more.
• It had more than 10 employees on a typical business day during the preceding calendar year. The IRS measures that in hours: more than 80 employee hours on an average typical business day passes the test.

The 8 percent rule

If the tips reported to the employer during a payroll period are less than 8 percent of gross receipts, the employer must allocate the difference among the employees who receive tips. Gross receipts here leave out carryout sales and sales with a service charge of 10 percent or more. The employer can run the allocation for the whole year, by payroll period, or by another reasonable period, and the choice holds for the calendar year.

Only directly tipped employees get allocations: people like waitstaff and bartenders who receive tips straight from customers. Indirectly tipped employees, such as bussers, service bartenders and cooks, aren't allocated anything, and a directly tipped employee with no shortfall gets nothing either.

How the shortfall gets spread

There are three methods:

• Good-faith agreement. A written agreement between the employer and at least two-thirds of the tipped employees in each occupational category.
• Gross receipts method. The usual method when there's no good-faith agreement (an establishment that qualifies can use the hours-worked method instead). Each directly tipped employee's share of the 8 percent is based on the sales attributed to them.
• Hours-worked method. Allowed for establishments with fewer than the equivalent of 25 full-time employees (tipped and nontipped) during the payroll period, which the IRS defines as averaging under 200 employee hours a business day.

Worked example: the gross receipts method

One payroll period, $100,000 in gross receipts, so the 8 percent target is $8,000. The busser reports $1,000 in tips, which leaves $7,000 as the servers' share.

Everyone together reported $7,000 against the $8,000 target, so $1,000 gets allocated. Server A is the only one with a shortfall, so all $1,000 goes on A's W-2 in box 8. Server B reported more than B's share and gets nothing. If several servers are short, the $1,000 is split in proportion to each person's shortfall.

Lowering the rate

The employer, or a majority of the employees, can petition the IRS for a rate below 8 percent, but not below 2 percent. "Majority" means more than half of all directly tipped employees, and they must consent to any petition written by an employee. The petition has to clearly show that a rate under 8 percent should apply, is signed under penalties of perjury, and comes with a user fee. An employer can only use a lower rate once the IRS approves it. The 2026 draft instructions keep the 8 percent rate and the 2 percent floor.

If your restaurant's real tip rate is lower than 8 percent, a petition is the fix, because a lower rate shrinks the target that every allocation is measured against.

What to do with box 8

Allocated tips sit in box 8 only. They aren't included in box 1, and no income tax, Social Security or Medicare was withheld on them. On your return, you include them on Form 4137 and as income, which means paying Social Security and Medicare on them yourself, unless you have adequate records showing that your unreported tips were less than the box 8 amount.

That exception is why the daily log matters. If you reported every tip and your log backs it up, you can report your actual figure instead of the allocation. Don't count on your employer to fix it: the instructions say an employer that allocates under these methods isn't liable to any employee for an improper allocation. Your records are the defense. Cashout logs each shift's tips, tip-outs and hours, and the tip log template works too. Reporting every month as described in reporting tips to your employer keeps you out of box 8 to begin with.

Common questions

Can I get allocated tips if I reported everything?

Yes, if your reported tips are below your share of 8 percent of your sales. That can happen on a slow-tipping section even when you reported every dollar. Your records are what let you report less than the allocation on your return.

Do allocated tips count for the tips deduction?

The final regulations require tips to be reported on a W-2 or 1099, or by you on Form 4137, to be eligible. I couldn't find IRS guidance that speaks directly to allocated tips. Tips you really received and report on Form 4137 can count; see the No Tax on Tips guide.

Does a fast-food job ever have tip allocation?

No. Fast-food operations are left out of the definition, so they aren't large food or beverage establishments.

Does my employer withhold tax on allocated tips?

No. Nothing is withheld on them, which is why they show up as a balance due if you have to report them.

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