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Read MoreRestaurant workers are paid a lower wage if they receive tips from customers. Tip income is not the income of the restaurant but the income of the tipped employee. This income is referred to as a pass-through when it is charged to a credit card. As a result, tip income is not considered in a restaurant’s income and is not a part of the business income calculation. The claim preparers calculated tip income for the insured’s employees once they realized this coverage was allowed. They calculated tip income based on the previous months. This is a new insurance coverage available from some carriers. The policy states, “If ordinary coverage is covered, then business income includes tip income of your employees as reported by you to the Internal Revenue Service.”
The claim preparers did not consider the seasonality of the business. As the pre-loss revenue was significantly greater than the previous months, the average tips in the previous weeks did not reflect the tips that would have been earned during the period of loss. Our research determined that the insured must file Form 8027 with their annual Federal Tax Return. This form reports the facts of the total charged tips for the calendar year and the total charge receipts showing charged tips. Utilizing this form, we determined the tips reported to the Internal Revenue Service and developed the actual average percentage of tip income reported to revenue reported. The claim preparer’s tip calculation at dollar value was 30% of the actual lost revenue we calculated. Our calculation was only 10% of revenue as we utilized the facts found on Form 8027 filed with the IRS. Our research yielded a significant difference in value.
Please note that not all revenue earned at a restaurant has related tip income, and not everyone tips 15% on their bill. Examples include gift cards, takeout, room rentals, souvenirs and gifts, employee food, bad tippers, and unsatisfied customers.
Paula Essick
Vice President
Forensic Accounting - Insurance Services
+1 773 249 9176
[email protected]
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