Large Food and Beverage Establishments

Employers that are "large food and beverage establishments" are subject to special tip reporting and allocation rules. These rules require you to allocate at least 8 percent of your gross receipts to employees as tips, if your employees don't report receiving at least that much. The allocations are not used to determine your actual payroll tax obligations, however; they are reported to the IRS strictly for informational purposes.

Now, in your mind, your business may not constitute a large establishment. However, the IRS's definition of "large" may not mesh with yours. (It probably wouldn't be the first time you didn't see eye-to-eye!) For tip reporting and allocation purposes, the IRS says a large food or beverage establishment is any trade or business that:

• is a food or beverage operation where tipping is customary; and
• normally employed more than 10 employees on a typical business day during the preceding calendar year

Food or beverage operations with customary tipping. A food or beverage operation is any business activity that provides food or beverages for on-site consumption, but does not include fast-food operations, where the customers order, pick up, and pay for food and beverages at a counter or window and carry the food to another location, either on or off the premises.

Tipping is not considered customary at cafeteria-style operations or self-service operations if the customer pays or receives a check before being seated. Tipping is also not considered customary if at least 95 percent of an establishment's total sales are either carryout sales or services for which a service charge of 10 percent or more is added. These sales and services are called "nonallocable receipts" and can be estimated in good faith based on generally accepted accounting principles if they are not recorded separately from other receipts.

Ten or more employees. So you think that determining whether you have 10 or more employees is as simple as counting your employees? Guess again — we're dealing with federal taxes here, so don't expect anything so simple! Based on the rules noted below, Uncle Sam may deem you to have fewer than 10, even though you actually employ more. Read on!

An employer is considered to employ more than 10 employees on a typical business day during a calendar year if, on an average day, more than 80 employee hours were worked in the establishment. You must count all employees of your operation, not just food and beverage employees.

To determine whether you have more than 10 employees on a typical business day for a calendar year, use the following procedure:

• Step 1: For the month with the highest gross receipts for the year, divide the total hours worked by all employees by the number of business days in that month.
• Step 2: Make the same calculation for the month with the lowest gross receipts.
• Step 3: Add the results of the first two calculations and then divide the sum by two.

If the result of this calculation is more than 80 hours, you are considered to have employed more than 10 employees on a typical business day.

Phil's Diner is open five days per week. In August, when its receipts were highest, the total number of employee hours worked was 1,500 and the diner was open 23 days. In February, when its receipts were lowest, the total number of employee hours worked was 1,000 and the diner was open 21 days. The average number of employee hours worked per business day in August was 65 and in February, 48. The sum of those figures is 113. After dividing by 2, the result is 57, rounded up. Phil's Diner is not deemed to have employed more than 10 employees during a typical business day; thus, it is not subject to the reporting requirements of large food or beverage establishments.

If you operate a seasonal food or beverage operation, you may be considered to be a large food or beverage operation on the basis of one successful month!

Warning If, in any one month, more than 160 employee-hours are worked on the average day, you are deemed to employ more than 10 employees per typical business day because, even if no employees worked in some other month, the average employee hours still exceed 80.

In the calendar year in which a food or beverage operation is a new business, it is considered a large food or beverage establishment if all of its employees together work more than an average of 80 hours per business day during each of any two consecutive calendar months.