HOTEL ACCOUNTING POLICY AND PROCEDURE MANUAL

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together to return to the top of the page.

ACCOUNTS PAYABLE AND PURCHASING:

AP – 100 CHECKBOOK ACCOUNTING
AP – 102 PURCHASE REQUISITIONS AND PURCHASE ORDERS
AP – 104 RECEIVING OF GOODS AND SERVICES
AP – 105 TRAVEL AGENT COMMISSIONS
AP – 106 DISBURSEMENTS VIA CHECK, WIRE TRANSFER OR ACH
AP – 115 EMPLOYEE EXPENSE REPORTS
AP – 120 ADVANCE DEPOSITS
AP – 125 VENDOR LETTERS
AP – 130 CAPITAL EXPENDITURES, EXCLUDING CAPITAL LEASES
AP – 135 OWNER STATEMENTS & DISBURSEMENTS (CONDOHOTELS)
AP – 140 PREPAID EXPENSES
AP – 145 ACCRUED LIABILITIES
AP – 150 VENDOR STATEMENT RECONCILIATION
AP – 155 CHECK STOCK CONTROL
AP – 160 CRITICAL DATE LIST OF RECURRING EXPENSES
AP - 165 SALES, USE AND OCCUPANCY TAX REPORTING

ACCOUNTS RECEIVABLE CONTROL:

AR – 100 CREDIT POLICY AND DIRECT BILLING AUTHORIZATION
PROCESS
AR – 105 DIRECT BILLING AND COLLECTION PROCESS
AR – 107 ACCOUNTING FOR CITY LEDGER TRANSACTIONS
AR – 110 GUEST LEDGER CREDIT POLICY AND PROCEDURES
AR – 115 GUEST LEDGER ADJUSTMENTS AND TRANSFERS
AR – 118 ACCOUNTING FOR CREDIT CARD RECEIVABLES
AR – 120 ACCOUNTING FOR CREDIT CARD CHARGE-BACKS
AR – 125 ACCOUNTS RECEIVABLE AGING STANDARDS
AR – 130 RESERVE FOR DOUBTFUL ACCOUNTS
AR – 135 EMPLOYEE WAGE ADVANCES
AR - 140 EMPLOYEE TRAVEL ADVANCES

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CASH CONTROL:
CASH – 100 EMPLOYEE ISSUED HOUSE BANK FUNDS
CASH – 105 DROP SAFE PROCEDURES
CASH – 110 CASHIER OVER/SHORT REPORTING
CASH – 112 DAILY CASH, CHECK AND CREDIT CARD DEPOSITS
CASH – 115 ARMORED CAR TRANSPORT OF HOTEL FUNDS
CASH – 120 SAFE AND HOUSE FUND STORAGE BOX ADMINISTRATION
CASH – 125 CHECKS RECEIVED IN MAIL
CASH – 127 WIRE TRANSFERS RECEIVED
CASH – 130 PETTY CASH
CASH – 135 BANK ACCOUNT ESTABLISHMENT
CASH – 140 BANK ACCOUNT RECONCILIATION – DEPOSITORY ACCT
CASH – 142 BANK ACCOUNT RECONCILIATION – CREDIT CARD ACCT
CASH – 144 BANK ACCOUNT RECONCILIATION – CHECKING ACCOUNTS
CASH – 150 VENDING MACHINE PROCEDURES

OPERATED DEPARTMENT CONTROLS:

OPS – 105 LABOR SCHEDULING, REPORTING AND CONTROL
OPS – 110 HOUSEKEEPING DISCREPANCY REPORT
OPS – 120 FOOD AND BEVERAGE INVENTORIES
OPS – 125 FOOD AND BEVERAGE STORAGE AND REQUISITION
OPS – 127 FOOD OUTLET CONTROLS
OPS – 129 BEVERAGE OUTLET CONTROLS
OPS – 130 BANQUET CONTROLS
OPS – 132 EMPLOYEE CAFETERIA COSTS
OPS – 135 ACCOUNTING FOR PROMOTIONAL CHARGES
OPS – 145 GIFT CERTIFICATES
OPS – 150 INCOME AUDIT PROCEDURES
OPS - 155 INVENTORY OF RETAIL OUTLETS

PAYROLL CONTROLS:
PR – 100 PAYROLL PROCESSING
PR – 110 PAYROLL GARNISHMENTS
PR – 115 PAYROLL CHECK/DIRECT DEPOSIT DISTRIBUTION
PR – 120 TIP REPORTING AND PROCESSING – FOOD AND BEVERAGE
OUTLETS
PR – 125 BANQUET SERVICE CHARGES AND MISC GRATUITIES
PR – 130 MANAGERS’ RESPONSIBILITIES FOR PAYROLL DATA

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ADMINISTRATIVE POLICIES:
ADM – 100 CONTRACT, LEASE AND LICENSE ADMINISTRATION
ADM – 110 RECORD RETENTION SCHEDULE
ADM – 115 SALES TAX EXEMPTION
ADM – 120 BALANCE SHEET RECONCILIATION
ADM – 130 GUEST PACKAGE RECEIVING AND SHIPPING
ADM – 135 TRADEOUT ACCOUNTING PROCEDURES
ADM – 140 UNCLAIMED CHECKS & ESCHEAT
ADM – 145 SAFETY DEPOSIT BOXES ISSUED TO GUESTS

FORMS:
FORM AR-105A CREDIT APPLICATION FORM
FORM AR-105B CLIENT COLLECTION LOG
FORM AR-105C COLLECTION LETTER #1
FORM AR-105D COLLECTION LETTER #2
FORM AR-105E COLLECTION LETTER #3
FORM AR-110B CREDIT CARD AUTHORIZATION FORM
FORM AR-135 EMPLOYEE WAGE ADVANCE PROMISSORY NOTE
FORM AR-140 EMPLOYEE TRAVEL ADVANCE PROMISSORY NOTE
FORM CA-100 HOUSE BANK CONTRACT
FORM CA-102 HOUSE BANK COUNT SUMMARY
FORM CA-105 DAILY DEPOSIT DROP LOG
FORM CA-112 DAILY CASH AND CREDIT CARD DEPOSIT WORKSHEET
FORM CA-125 CHECKS RECEIVED IN THE MAIL LOG
FORM CA-127 WIRE TRANSFERS RECEIVED LOG
FORM CA-140 BANK ACCOUNT RECONCILIATION FORM - DEPOSITORY
FORM CA-142 BANK ACCOUNT RECONCILIATION FORM – CREDIT CARDS
FORM CA-144 BANK ACCOUNT RECONCILIATION FORM – CHECKING AC
FORM ADM-100 CONTRACTS, LEASES AND LICENSES SCHEDULE
FORM ADM-130 PACKAGE TRANSFER FORM

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SECTION: AP NUMBER: 102 EFFECTIVE DATE: 1/1/2005

PURCHASE REQUISITIONS AND PURCHASE ORDERS
APPROVED: CFO Signature ICQ REFERENCE:

POLICY:

It is the policy of the hotel to require the issuance of an approved purchase order prior to ordering
any goods or services for the hotel. The only exceptions to this policy are consumable food and
beverage items, items for which an approved check request has been issued in advance of the
purchase, contractual obligations for which a properly authorized contract exists, or a single item or
groups of items costing collectively less than $100.00.

PRIMARY CONTROL IMPLEMENTATION AND RESPONSIBILITY:

It is the Controller/DOF’s responsibility to administer this policy, and the responsibility of each
person charged with procuring goods or services for the hotel to adhere to this policy.

PROCEDURE:

For a complete illustration of the entire purchasing and receiving process, please review the
flowchart on Illustration AP-1.

The procedures below assume a paper PO system, but the same principles apply to an electronic
system.

1) After determining if funds are available for the purchase of goods or services, (see SOP AP
100 – Checkbook Accounting), a Purchase Requisition is completed by the person requesting
the purchase. A Purchase Requisition details the information necessary to make a purchasing
decision as follows:
a) Vendor information including name, address and phone or e-mail contact information.
b) Quantity, unit price, extended price of units. Cost of freight, sales tax, duties and the
total cost of this purchase.
c) Reason for purchase.
d) The availability of funds for this purchase. On the purchase requisition, the fund
availability area shows the checkbook prior balance, amount of this purchase, and
balance remaining after this purchase. If adequate funds are not available, an
explanation of which account category was reduced in order to increase the funds
available for this purchase. Only the General Manager has the authority to override
checkbook restrictions and approve purchases wherein adequate funds are not available
in a department’s forecast.
2) Purchases over $1,000 that are non-repetitive in nature require two bids from competing
vendors.
3) Repetitive purchases for goods such as office supplies must be put out for competitive

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bidding on an annual basis.

4) Contract services such as maintenance contracts must be re-bid with at least three
competitive bids as contracts expire. (See also SOP ADM 100-Contract, Lease and License
Administration).

5) The Purchase Requisition is routed for approval as follows:

a) Department Manager may purchase goods or services up to $100 without further
approval.
b) Division Head (EC Member) must approve all departmental requisitions, and has
approval level of up to $500 without further approval. Route requisition to A/P after
signature.
c) General Manager must approve all requisitions over $1000 in value.
d) Controller must approve all requisitions over $500 in value.
6) If the Purchase Requisition is approved, a number is assigned to the requisition, at which
point the requisition becomes a Purchase Order (PO). The PO is simply a purchase
requisition that is fully signed and is assigned a Purchase Order Number.
Nothing may be ordered by the hotel (excluding exceptions noted above) without a signed
purchase order. The hotel reserves the right to refuse delivery of any good or service for
which a signed purchase order has not been completed. (See also SOP AP-125 Vendor
Letters.)
7) The Purchase Order is now routed to the Accounts Payable department for distribution of
copies:
a) Copy 1 (Original) is routed back to the originator to facilitate purchasing the items. The
vendor should be sent a copy of this purchase order.
b) Copy 2 (Yellow) is routed to the Receiving Department and is filed in a temporary
receiving file until goods are received. (See SOP AP 104 – Receiving of Goods and
Services).
c) Copy 3 (Pink) remains in A/P to be filed numerically.
8) Goods or services are now ordered by the originator or the purchasing department (see
breakdown on the following page).

The following products or services are typically ordered by the following individuals:

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Product or Service Who Orders?

Food and Beverage consumable products Purchasing Department
Food and Beverage Linen, China, Glass, Silver Food and Beverage Director/Director of
Operations
Rooms Linen and Glassware Rooms Director/Director of Operations
Department Other Expenses Department Managers
Maintenance Contracted Services Director of Engineering
Capital Goods GM, Controller or Director of Engineering

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SECTION: AR NUMBER: 100 EFFECTIVE DATE: 1/1/2005

CREDIT POLICY AND DIRECT BILLING AUTHORIZATION PROCESS
APPROVED: CFO Signature ICQ REFERENCE:

POLICY:

Hotel Clients interested in establishing a direct billing relationship with the hotel must comply with the
minimums, limitations and procedures set forth in this policy.

PRIMARY CONTROL IMPLEMENTATION AND RESPONSIBILITY:

It is the booking Sales Manager's responsibility to establish a method of payment prior to the group’s
arrival. The Director of Sales and Marketing, Controller/DOF and General Manager are responsible
for administering and monitoring adherence to this policy.

PROCEDURE:

The method of payment must be addressed in the initial sales phase and the method of payment must
be agreed to in the final sales contract.
Direct Billing Privileges will only be granted to certain groups. For groups that will not be
considered for direct billing and require payment in advance, the procedures to handle advance
payments are as follows:
 Any events that fall into the category of Political, Sports, Theatre, Travel agencies, School
functions (except as covered by a School District Purchase Order), Weddings, Bar/Bat
Mitzvahs, Religious, Christmas Parties, Contests, any function depending upon ticket sales,
and any business with total billable revenue under $5,000 will not be considered for direct
billing.
 For such groups where payment in advance is required by policy, it is the booking Sales
Manager’s responsibility to communicate this policy requirement to the client during initial
phase of the sales process.
 The booking Sales Manager must ensure that full payment is received 5 days prior to the start
of the event. This may be in the form of cash, credit card or company/personal check.
(Accounts Receivable is responsible for getting check guarantee approval for all checks
received within the last 10 days prior to the group’s event, and for obtaining credit card
approval for the amount of the prepayment at least 5 days before the function.) Any
payments made after this 5-day window must be in the form of cash or cashiers check a
minimum of 3 days (72 hrs.) prior to the group’s arrival. FULL PRE-PAYMENT must be
received a minimum of 3 working days prior to the start of the event or the event will not
take place.

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Government, Military and School District Purchase Orders will be accepted in lieu of a Credit
Application to establish a direct billing relationship with the hotel. The booking Sales Manager is
responsible to ensure that the Purchase Order is sufficient to cover all charges, including sales tax.
(In general, such groups are not exempt from sales/occupancy tax. See SOP ADM-115 Tax
Exemption).

Credit Card Payment

Events may be paid by credit card upon completion of a credit card authorization form (Form AR-
110B) and MUST include copy of the front and back of the card. The credit card authorization must
include an estimate of anticipated charges. Account Receivable is responsible to obtain a credit card
authorization code three (3) business days prior to the start date of the event. The final balance will
be charged by AR the day after the event. It is imperative that the booking Sales Manager notify AR
if the anticipated charges vary from this original amount.

Direct Billing Authorization Process: CREDIT CARDAUTH

Direct Billing privileges will be extended to groups that do not fall under the prepayment
requirement policy outlined on the prior page, and that are approved by the Controller or General
Manager in accordance with the following procedures:
1) A credit application (Form AR-105A) must be sent to the client by the booking Sales
Manager, completed by the client and returned and reviewed by the booking Sales Manager.
Once reviewed, the booking Sales Manager forwards the application to Accounting, retaining
a trace file copy for the sales file. The application must be returned by the client no later
than 30 days prior to arrival of the group. (For internal purposes, a minimum of 21 days in
advance is required.)
2) The credit application must be processed by Accounts Receivable, and acceptance/denial of
the application communicated back to the booking Sales Manager at least two (2) weeks
prior to the arrival of the group. It is recommended that the process of checking the client’s
credit be outsourced to a company that processes such credit applications for the hotel
industry.
3) If processing the credit application is done in-house, at least two hotel references must be
contacted to determine the client’s payment history, and the client’s bank must be contacted
to provide the client’s bank history. The application is then forwarded to the Controller for a
credit decision.
4) In the event that the Controller denies the application, the decision may be appealed to the
General Manager who has final say on the billing decision. If the GM chooses to override the
Controller’s decision, the Controller is not responsible for the final outcome of the billing
process, but will make every attempt to collect the amount due.

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Ensuring that all Hotel Groups, Banquet or Catering Groups have a form of payment:
Each week the hotel is to conduct a “BEO Review Meeting”. A representative from the Accounts
Receivable function of the hotel must attend this meeting. The purpose of the A/R person’s
attendance is twofold:
1) To ensure that each group coming to the hotel has an approved form of payment in advance
of their arrival.
2) To gain intimate knowledge of the group that will assist in the billing process.
If an approved form of payment has not been determined for each group, banquet or catering event
to arrive at the hotel in the next 10 days, immediate action by the booking Sales or Catering Manager
must take place, and the manager must notify Accounts Receivable immediately upon receipt of the
form of payment.

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SECTION: CASH NUMBER: 105 EFFECTIVE DATE: 1/1/2005

DROP SAFE PROCEDURES
APPROVED: CFO Signature ICQ REFERENCE:

POLICY:

The purpose of this policy is to protect the cash assets of the hotel, and to provide a written audit trail to
protect the cashier. All cash, check and voucher deposits are to be completely logged onto the Daily
Deposit Drop Log.

PRIMARY CONTROL IMPLEMENTATION AND RESPONSIBILITY:

Each individual cashier is responsible to secure a witness and perform a drop of their cash, checks and
vouchers into the hotel’s drop safe immediately following their work shift, and to verify that the deposit
has fallen safely into the drop safe. The Controller and General Cashier are responsible for properly
retrieving daily deposits that are dropped by cashiers.

PROCEDURE:

Individual Cashiers’ Procedures:

1) Once a cashier has counted their house bank funds and separated those funds from the cash and
checks that they are going to deposit (drop) at the end of their shift, they are responsible to prepare a
Cashier’s Report envelope listing the contents and total amount of funds to be dropped.
2) The cashier is to secure a witness before the drop can be made.
3) In the presence of the witness, the cashier is to list their name, outlet (department), time and
amount of their deposit on the “Daily Deposit Drop Log” (see Form CA-105). Amounts “due back” to the
cashier should be listed on the Daily Deposit Drop Log in (parentheses). The cashier then places the
deposit envelope in the drop safe, and obtains the witness signature on the “Daily Deposit Drop Log”.
Deposits made without a witness signature subject the cashier to disciplinary action.
4) A “Daily Deposit Drop Log” must be kept at the drop safe at all times. If one is not present, a
supervisor must secure one.
5) Cashiers should never drop their deposit simultaneously with other individuals making a deposit.
This has the potential to cause confusion during the drop process.
6) The last cashier dropping their cash for the day, (usually the night desk clerk/auditor), is requested
to drop the Daily Deposit Drop Log into the drop safe for later retrieval by the General Cashier.

Daily Drop Safe Retrieval Process:

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1) See SOP CASH – 120 SAFE AND HOUSE FUND STORAGE BOX ADMINISTRATION
for dual access to the drop safe requirements, and other administrative requirements.

2) The drop safe must be opened and the contents documented by two people at all times.
Never should either party to the “safe pull” be distracted or leave the area.

3) Once the contents are pulled from the drop safe, one person counts the envelopes for the day,
while the other person counts the number of witnessed drops that appear on the Daily
Deposit Drop Log. If the two counts do not match, the envelopes must be verified against
the Drop Log to determine if a drop is missing. If a drop is missing, an Executive Committee
member must be contacted before leaving the room, and the EC person must verify that the
drop is missing. If the count of envelopes matches the count on the Drop Log, then the
number of envelopes retrieved is documented on the drop log, and the two people retrieving
the envelopes must each sign the Drop Log.

4) The two must lock the drop safe, and walk together back to the General Cashier’s office for
security purposes.

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SECTION: OPS NUMBER: 129 EFFECTIVE DATE: 1/1/2005

OUTLET BEVERAGE CONTROLS
APPROVED: CFO Signature ICQ REFERENCE:

POLICY:

This organization will consistently follow the control procedures herein listed in all beverage outlets
under its management.

PRIMARY CONTROL IMPLEMENTATION AND RESPONSIBILITY:

The Controller/DOF is primarily responsible to ensure that a comprehensive system of internal

controls is put into operation within all food and beverage outlets. The Director of Food and
Beverage is responsible to ensure that the controls put into operation are consistently implemented
and put into practice in all food and beverage outlets.

PROCEDURE:

The following list of internal controls, or acceptable variations thereof, is to be put into operation
and consistently implemented in all food outlet operations.

Purchasing Procedures and Controls:

 All purchasing policy and procedure guidelines are to be followed in accordance with SOP
AP 102 - Purchase Requisitions and Purchase Orders.
 Par Levels are to be established by the person in charge of Purchasing, and signed off by the
Food and Beverage Director. The par levels should be set at an amount that is sufficient to
order enough stock to supply the beverage operation in normal operating conditions.
 Any changes made to beverage pars, including wine, liquor or beer menu changes that affect
beverage inventory must be approved by the General Manager, Food and Beverage Director
and Controller/DOF.
 Prior to stocking supplies related to any menu changes, a plan for the dissolution of old stock
on hand must be presented by the Food and Beverage Director to the General Manager and
Controller for approval.
 Prior to placing orders with beverage vendors, any adjustments for special event beverage
sales such as New Years Eve, weddings, etc., must be considered and the purchase adjusted
accordingly.
 Purchase quantities should be adjusted to take advantage of any vendor discounts or special
promotions being offered, after approval by the Food and Beverage Director.

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Receiving Procedures and Controls:

 All receiving policy and procedure guidelines are to be followed in accordance with SOP
AP-104 – Receiving of Goods and Services.
 All beverage product received must be received by an approved Manager/Supervisor.
 As items are received they must be checked as follows:
o Each item must match the ordered specification with regard to brand and size of
container.
o Each item must be verified to the quantity ordered.
o Each item must be verified to the invoice.
o Items purchased by quantity per case must be verified to the case received.
 For any items listed on the invoice that did not meet specification standards, or were simply
not delivered, a credit memo must be completed immediately, before the delivery person
leaves the property. The credit memo must state the following:
o The reason for the credit, i.e. item not delivered, item did not meet quality standard,
etc.
o The signature of the driver.
o The amount of the credit in quantity, price and extended total credit amount.
 A credit log must be maintained and reconciled with the general ledger on a weekly basis.
o A Receiving Log must be prepared , and many more receiving procedures are
included in the actual SOP manual.

Requisitioning Beverage from Storage:

 Beverage requisitions must be filled out by the night shift for each beverage outlet and left
for the Receiving department to fill the next day.
 Liquor requisitions must be accompanied by an empty bottle for each bottle of liquor being
requested from inventory. Liquor requisitions will only be filled in a bottle-for-bottle
exchange.
 When liquor is being issued to outlets, the Receiving person filling the requisition must
examine the bottles to find the non-removable sticker on each bottle. Any empty bottles
without the hotel’s unique tag will be reported to the Controller/DOF and Food and Beverage
Director.
 For wine being requisitioned, a system of comparing bottles of wine sold individually and by
the glass as evidenced by the Beverage Abstract Reports from the Point of Sale system for
the prior day to the requisitioned bottle count must be maintained. Wine should then be
issued according to the Abstract Reports.

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 A bin tag system should be utilized for all outlet wines.

 Bar pars must be spot checked weekly to ensure proper stock and to look for bottle tags.

Inventory and Storeroom Control:

 Keys to beverage storeroom(s) should be available only to the Beverage Purchaser, Beverage
Management and Food and Beverage Director.
 All beverage storage areas must be kept secured at all times.
And many more inventory and stockroom controls are featured in the actual SOP manual.
Cost Management Controls:

Pricing Controls:

 Wine menus must be cost-extended prior to implementation of any menu item to ensure
proper pricing.
 Liquor, beer and soda pricing must be reviewed at least semi-annually.

Dispensing Controls:

 Liquor dispensing systems must be calibrated at least quarterly.

 Where dispensing systems are not used, all liquor must be poured using a one ounce jigger,
and “tails” will not be allowed.
 All liquor pours must be made using an approved one ounce standard stainless steel jigger.
 No free-pouring is allowed.
 All liquor, wine, beer and soda dispensing systems must be turned off, secured or otherwise
disabled after closing.

Sales and Receipt Controls:

 Point of Sale systems must have a display that is clearly visible to customers.
 All drink orders must be rung up immediately upon order. No delay should exist between the
time a drink is ordered and the time a drink is entered into the Point of Sale system.
 All drink orders called to bartenders must be accompanied by a Point of Sale drink ticket or
“chit”.
 All drink orders must be redlined or otherwise defaced or torn after service to prevent re-use
of the chit or ticket.
 All cash drink checks must be placed in a lock box after cash is collected to prevent re-use.
 The cash drawer must be closed between transactions.

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Plus 15 more Sales and Receipt Controls in the actual SOP Manual.

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SECTION: PR NUMBER: 120 EFFECTIVE DATE: 1/1/2005

TIP REPORTING AND PROCESSING – FOOD AND BEVERAGE OUTLETS
APPROVED: CFO Signature ICQ REFERENCE:

POLICY:

It is the policy of this organization to be in compliance with all tip reporting regulations established
by the Internal Revenue Service regarding employees in tipped positions. An agreement with the
IRS will be signed by the CFO detailing the compliance requirements under either the Tip Rate
Determination Agreement (TRDA) or the Tip Reporting Alternative Commitment (TRAC).

PRIMARY CONTROL IMPLEMENTATION AND RESPONSIBILITY:

It is the responsibility of the Corporate Controller or CFO to obtain and sign a tip reporting
agreement with the IRS, or to develop a system acceptable to the IRS for reporting tips. The hotel
Controller/DOF is responsible to comply with the reporting requirements established by the
agreement signed with the IRS.

PROCEDURE:

Federal law requires that all employees must report all tips received. This law encompasses all
employees in all positions where tips are received. In this policy, we are specifically addressing the
required tracking, reporting and allocating of tips in food and beverage outlets. Banquet gratuities
and service charges, bellman gratuities and housekeeper gratuities are not included in this policy, but
are detailed in SOP PR 125 - Banquet Service Charges and Miscellaneous Gratuities

Food and Beverage outlets:

Based on the agreement signed with the IRS (TRDA or TRAC), related systems must be established
within the organization to comply with the reporting and tracking requirements in the agreement.

Assuming that the TRAC agreement is signed, the requirement is that all employees in a tipped
position are to be given a statement of gross receipts, charge sales and charge tips, as shown on the
attached “Example of a TRAC Statement” from the IRS.

In addition to the TRAC agreement requirements, IRS tip reporting requires that the employer track
the following information for the employee:
 Gross Sales by Employee
 Charge Sales by Employee (Charge sales include sales paid by credit card or charged to a
guest room.
 Charge Tips (Tips on charge sales from above)
 Cash Tips reported by the employee

Declared tips are those cash and charge tips reported to the employer. For Food and Beverage

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Servers, charge tips are automatically declared, less any indirect tips paid out (to buspersons,
bartenders, bar-back attendants, etc.). For employees receiving tips indirectly from food or beverage
servers, only cash tips will be reported.

Using the TRAC reporting system, the employee is required to declare their tips each day. Then, at
a minimum on a monthly basis, the employee must be presented a report showing their gross sales,
charge sales, charge tips, declared cash tips and tips paid out to attendants. This information is
accumulated for reporting the annual Form 8027 to the IRS. Form 8027 is a memorandum form
filed with the IRS that will show any tip declaration shortfalls of less than 8% of gross reportable
sales, and will allocate tips based on relative sales and tips declared by employees. This shortfall
will show up on the employee’s W-2 as allocated tips. This form (8027) must be completed by the
Controller/DOF each year.

Below is an excerpt from the IRS instructions defining what is to be included in “Gross Receipts”
and when to allocate tips.
Gross Receipts

Gross receipts include all receipts (other than nonallocable receipts, see definition below) from cash sales, charge receipts, charges to a hotel room (excluding tips charged to the hotel room if your
accounting procedures allow these tips to be separated), and the retail value of complimentary food or beverages served to customers as explained below.

Also include charged tips in gross receipts, but only to the extent that you reduced your cash sales by the amount of any cash you paid to tipped employees for any charged tips due them. However, if
you did not reduce cash sales for charged tips paid out to employees, do not include those charged tips in gross receipts. Do not include state or local taxes in gross receipts.

Remind all directly and indirectly tipped employees to include all charged tips and all cash tips received in the tip amount that they must report to you.
Nonallocable receipts. These are receipts for carryout sales and receipts with a service charge added of 10% or more. (Nonallocable receipts generally include all sales on which tipping is not
customary).
Complimentary items. Food or beverages served to customers without charge must be included in gross receipts if: (a) tipping for providing them is customary at the establishment, and (b) they are
provided in connection with an activity that is engaged in for profit and whose receipts would not be included in the amount on line 5 of Form 8027.
For example, you would have to include in gross receipts the retail value of the complimentary drinks served to customers in a gambling casino because tipping is customary, the gambling casino is
an activity engaged in for profit, and the gambling receipts of the casino are not included in the amount on line 5.
However, you would not have to include the retail value of complimentary hors d'oeuvres at your bar or a complimentary dessert served to a regular patron of your restaurant in gross receipts
because the receipts of the bar or restaurant would be included in the amount on line 5. You would not have to include the value of a fruit basket placed in a hotel room in gross receipts since,
generally, tipping for it is not customary.

Allocation of Tips

You must allocate tips among employees who receive them if the total tips reported to you during any payroll period are less than 8% (or the approved lower rate) of this establishment's gross receipts
for that period.

Generally, the amount allocated is the difference between the total tips reported by employees and 8% (or the lower rate) of the gross receipts, other than nonallocable receipts.

Lower rate. You (or a majority of the employees) may request a lower rate (but not lower than 2%) by submitting an application to:

Internal Revenue Service

Compliance Policy Group
S:C:CP:RC:ET, Room 2404
1111 Constitution Ave. NW
Washington, DC 20224
The burden of supplying sufficient information to allow the IRS to estimate with reasonable accuracy the actual tip rate of the establishment rests with the petitioner. Your petition for a lower rate must
clearly demonstrate that a rate less than 8% should apply. It must include the following:

• Employer's name, address, and EIN;

• Establishment's name, address, and establishment number;

• Detailed description of the establishment that would help to determine the tip rate. The description should include the type of restaurant, days and hours of operation, type of service
including any self-service, the person (waiter or waitress, cashier, etc.) to whom the customer pays the check, whether the check is paid before or after the meal, and whether alcohol is
available;

• Past year's information shown on lines 1 through 6 of Form 8027 as well as total carryout sales; total charge sales; percentage of sales for breakfast, lunch, and dinner; average dollar
amount of a guest check; service charge, if any, added to the check; and the percentage of sales with a service charge;

• Type of clientele;

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• Copy of a representative menu for each meal.

The petition must contain the following statement and be signed by a responsible person who is authorized to make and sign a return, statement, or other document.
“Under penalties of perjury, I declare that I have examined this application, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this
petition are true, correct, and complete.”
You must attach to the petition copies of Form 8027 (if any) filed for the 3 years prior to your petition. If you are petitioning for more than one establishment or you want to know your appeal rights,
see Revenue Procedure 86-21, 1986-1 C.B. 560 for additional information. Also include with your petition a check or money order made payable to the “United States Treasury” for the amount of the
user fee required for determination letters. For the current user fee amount, contact the IRS at 1-800-829-1040.
A majority of all the directly tipped employees must consent to any petition written by an employee. A “majority of employees” means more than half of all directly tipped employees employed by the
establishment at the time the petition is filed. Employee groups must follow the procedures in Regulations section 31.6053-3(h), Pub. 531, Reporting Tip Income, and Revenue Procedure 86-21.
The IRS will notify you when and for how long the reduced rate is effective.

Reporting Allocated Tips To Employees

Give each employee who has been allocated tips a Form W-2 that shows the allocated amount in box 8. The form must be furnished to the employee by January 31 of the following year. If
employment ends before the end of the year and the employee asks for the Form W-2, a tip allocation is not required on the early Form W-2. However, you may include on the early Form W-2 the
employee's actual tip allocation or a good-faith estimate of the allocation. Signify a good-faith estimate by writing “estimate” next to the allocated amount in box 8 of the Form W-2.

If no allocation was shown on the early Form W-2 or if the estimated allocation on the early form differs from the actual amount by more than 5%, give the employee Form W-2c, Corrected Wage and
Tax Statement, during January of the next year.

If you allocate tips among employees by the methods described in the instructions for lines 7a through 7c, you are not liable to any employee if any amount is improperly allocated. However, if the
allocation shown on the employee's Form W-2 differs from the correct allocation by more than 5%, you must adjust that employee's allocation and must review the allocable amount of all other
employees in the same establishment to assure that the error did not distort any other employee's share by more than 5%. Use Form W-2c to report the corrected allocation.

You do not need to send to the IRS separate copies of Forms W-2 showing allocated tips. The IRS will use the information shown on the Forms W-2 that you file with the Social Security Data
Operations Center.

Tip allocations have no effect on withholding income or social security or Medicare taxes from employees' wages. Allocated tips are not subject to withholding and are not to be included in boxes 1, 3,
5, and 7, of Form W-2.

In summary, the formula for tip allocation is as follows using broad example numbers:

1. Aggregate Gross Receipts for the outlet 1,000,000

2. Multiply Gross Receipts by 8% 80,000
3. Deduct tips reported by Indirectly tipped employees (15,000)
4. Net minimum tips to be reported by directly tipped ee’s 65,000
5. Tips reported by directly tipped employees and tracked gross receipts:

Employee Gross Receipts % of Total Receipts Tips Reported

Employee #1 100,000 10% 10,000

Employee #2 250,000 25% 10,000
Employee #3 200,000 20% 15,000
Employee #4 250,000 25% 15,000
Employee #5 200,000 20% 10,000
Totals 1,000,000 100% 60,000

As you can see from the table above, there is an overall shortfall of $5,000 that must be allocated.
To allocate the shortfall, you need to allocate the difference to those employees that underreported.
The allocation formula using the above example amounts is as follows:

Directly tipped EE’s share Tips Reported Employee

Shortfall
of 8% Gross Receipts
Employee #1 10% X 65,000=6,500 10,000 0
Employee #2 25% X 65,000=16,250 10,000 6,250

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Employee #3 20% X 65,000=13,000 15,000 0

Employee #4 25% X 65,000=16,250 15,000 1,250
Employee #5 20% X 65,000=13,000 10,000 3,000
Totals 65,000 60,000 10,500

Since the “Employee Shortfall” amount of $10,500 from the above table is greater than the required
aggregate shortfall amount, an additional calculation must be completed to allocate the $5,000
shortfall so as not to penalize the employees that reported at least 8%. The calculation is as follows:

Shortfall Ratio Reporting Shortfall

Allocation
Employee #2 6,250/10,500 = 59.5% 59.5% X 5,000 = 2,976
Employee #4 1,250/10,500 = 11.9% 11.9% X 5,000 = 595
Employee #5 3,000/10,500 = 28.6% 28.6% X 5,000 = 1,429
Totals 100% 5,000

The amounts for employees #2, #4 and #5 would be reported on form 8027 and appear on the
employee’s W-2 as allocated tips. The employee is then responsible for FICA taxes on the shortfall,
which amount to both the employer’s and the employee’s half of FICA, which doubles the
employee’s FICA liability.

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