Keyword: Tips/Allocated Tips
This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
4.12 Interest/Dividends/Other Types of Income: Tips
My Form W-2 includes allocated tips. What are they and how are they
taxed?
Certain employers must allocate tips if the percentage of tips reported
by employees falls below a required minimum percentage of gross sales. To
"allocate tips" means to assign an additional amount as tips to each employee
whose reported tips are below the required percentage. For additional information
on how the rules for tip allocation work, refer to Chapter 7 of Publication 17, Your
Federal Income Tax. All tips you receive are taxable. If you do not have
adequate records for your actual tips, you must include the allocated tips
shown on your Form W-2 (PDF) as additional
tip income on your return. You must also complete and attach Form 4137 (PDF), Social Security and Medicare Tax on Unreported Tips.
For more information on the requirements, refer to Tip Allocation in Publication 531, Reporting Tip Income. Refer to Tax Topic 402, Tips, for
other important information.
References:
My employer included allocated tips on my W-2 in box 1. The allocated
tips included were higher than I actually received. Do I have to pay taxes
on money I never received?
Allocated tips are reported in box 8 of Form W-2 and should not be included
in the amount in box 1. If they have been included in box 1, you need to get
a corrected Form W-2 from your employer.
By including the tip amount in box 1, the employer has indicated that this
is the tip amount you reported monthly and that Social Security tax and Medicare
taxes have been withheld (unless an amount indicating otherwise appears in
box 12). Your copies of your monthly tip reports and your daily tip log will
enable you to document that you reported a different tip amount if the W-2
income continues to be disputed. If you do not receive a corrected W-2, enter
the amount of wages and tips you believe to be correct on line 7 of Form 1040.
Keep your tip records to support the amount you reported.
You normally must report allocated tips (box 8, Form W-2) as income on
line 7 of your Form 1040 unless you have a daily tip record documenting that
you actually received less tips than the amount allocated to you. If you have
adequate documentation of your actual tip amount, include only the amount
of tips that were actually received and reported to your employer. This additional
amount of tip income, whether it is allocated tips or unreported tips, has
not had income tax, social security tax or Medicare taxes withheld. To correct
this, the tips should also be entered on Form 4137 (PDF), Social
Security and Medicare Tax on Unreported Tips. Enter the tax from Form
4137 on line 56 of Form 1040 and attach Form 4137 to your return.
References:
Is it legal for my employer to require me to report 10% of my total
sales as tips rather than reporting my actual tips?
No. When you report the actual tips you have received in the form of cash,
check, or charge, in a signed and dated report, you are complying with your
legal requirement. Your employer cannot legally ask you to do otherwise. Please
see Publication 531, Reporting Tip Income, for further information.
References:
Of my allocated tips, I tip out 15% to the busboy and 5% to the
bar. Where do I deduct this on my tax return?
You cannot deduct tip-outs (the tips you split with other employees) on
your tax return. Nor can you deduct them from your allocated tips. The practice
of tipping-out is one of the reasons you should keep a detailed daily log
of your tips. If you document that you tip out, and you reported all your
tips to your employer, then you do not include in your income the allocated
tips in box 8 of Form W-2.
Tipping-out, by itself, should not cause an allocated tip situation. First,
when you report the cash tips you receive, you should report the total tips,
then the amount tipped out. Publication 1244 (PDF), Employee's
Daily Record of Tips and Report to Employer, includes Forms 4070 and
4070A, Employee's Report of Tips to Employer that provides the following lines:
Cash tips received, line 1
Credit card tips received, line 2
Tips paid out, line 3
Net tips (lines 1 + 2 - 3), line 4
The detail of the information provided should enable your employer to develop
a reasonable, fair, and accurate method for determining whether tips need
to be allocated, and, if so, how much. Employers who operate large food and
beverage establishments are only required to allocate tips if the total tips
reported by all the employees who customarily receive tips are less than 8%
of gross sales. Thus, when there is a tip-splitting arrangement, it is important
that all tips, including those received through tip-splitting, be reported
to the employer by each employee who receives $20 or more in a month.
For more information, refer to Publication 531, Reporting Tip Income.
References:
If the reported tips from employees are more than 8% of sales, must
an employer still allocate tips to the employees?
No. Employers who operate "large food or beverage establishments" must
allocate tips among the employees who receive tips only if the reported tips
are less than 8% of the gross receipts from sales for that establishment for
a given period. Employers can also petition for a lower rate, for additional
information refer to Publication 531, Tip Income.
References:
Can the 8%, normally used for allocated tips, be a matter agreed
upon as reported tips between the employer and employees, so that the employees
do not have to report the exact amount of their tips?
No. The law requires that the employee who receives tips must report the
actual tip amount to his or her employer if the amount is $20 or more for
that calendar month. The 8% figure is not a simplified reporting method. If
an employee is customarily tipped between 10% and 20%, reporting only 8% of
his or her sales would not only lead to underreporting of income, but also
an underpayment of your of Social Security and Medicare taxes.
The employee should keep a tip record of his or her daily tips. A daily
tip record can relieve the employee from having to include allocated tips
in his or her income by documenting that the amount of tips the employee reported
were the actual amount received.
For more information on tip reporting for employees, refer to Chapter 7
of Publication 17, Your Federal Income Tax (For Individuals),
or Publication 531, Reporting Tip Income.
References:
12.3 Small Business/Self-Employed/Other Business: Form W–2, FICA, Medicare, Tips, Employee Benefits
If my part-time employees receive less than $20 a month in tips,
are they required to report them to me?
Employees who receive less than $20 per month in tips are not required
to report the tips to the employer, but they must include them in gross income
on their tax return. For additional information on tip withholding and reporting
requirements, refer to Tax Topic 761 , Tips - withholding and reporting and/or Publication 15, Circular E, Employer's Tax Guide.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Publication 1872 (PDF), Tips on Tips - A Guide
to Tip Income Reporting for Employees in the Food and Beverage Industry
- Tax Topic 761, Tips - withholding and reporting
As an employer, do I have any liability if my employees receive
tips but don't report them to me?
Employees who customarily receive tips are required to report their cash
tips to their employers at least monthly, if they receive $20 or more in the
month. Cash tips are tips received directly in cash or by check, and charged
tips. You have a liability to withhold and pay Social Security and Medicare
tax on your employees' reported tips, to the extent that wages or other employee
funds are available. If the employee does not report tips to you, it places
you at risk of possible assessment of the employer's share of the Social Security
and Medicare taxes on the unreported tips. If you are a large food or beverage
establishment (more than 10 employees on a typical day and food or beverages
consumed on the premises), you are required to allocate tips if the total
tips reported to you are less than 8% of gross sales. Report the allocated
amount on the employee's w-2 at the end of the year.
References:
If the reported tips from employees are more than 8% of sales, must
an employer still allocate tips to the employees?
No. Tip allocation is required when the amount of tips reported by employees
of a large food or beverage establishment is less than 8% (or an approved
lower rate) of the gross receipts, other than nonallocable receipts, for the
given period. If the employees are reporting more than the 8%, there would
be no allocated tip amount. However, the employer must still file Form 8027 (PDF), Employer's Annual Information Return
of Tip Income and Allocated Tips.
References:
Can the 8% - normally used for allocated tips - be a matter agreed
upon as reported tips between the employer and employees, so that the employees
do not have to report the exact amount of their tips?
No. The law requires that the employee who receives tips must report the
actual tip amount to his or her employer if the amount is $20 or more for
that calendar month. The 8% figure is not a simplified reporting method.
The employee should keep a record of his or her daily tips. A daily tip
record can relieve the employee from having to include allocated tips in income
by documenting that the amount of tips the employee reported was the actual
amount received.
References:
-
Instructions for Form 8027, Employer's
Annual Information Return of Tip Income and Allocated Tips
- Publication 3148 (PDF), Tips on Tips, A Guide
to Tip Income Reporting (Employees)
- Publication 3144 (PDF), Tips on Tips, A Guide
to Tip Income Reporting (Employers)
- Publication 1244 (PDF), Employee's Daily Record
of Tips and Report to Employer
- Publication 1872 (PDF), Tips on Tips - A Guide
to Tip Income Reporting for Employees in the Food and Beverage Industry
Can an employer add the reported tips to just one payroll a month,
even a special payment separate from the regular wage payment, and pay only
the wage amount on the other payroll dates?
An employer can report an employee's tip income and withhold taxes once
a month or more often than once a month. The two items of practical consideration,
besides the sophistication of your payroll system, are the employees' tip
reports and the charged tips.
The employees are required by law to report their cash tips only once a
month, by the 10th day of the month following the month for which they are
reporting. The employer may require the employees to report their tips more
often. This would facilitate withholding on tips and the reporting of the
tips as income on the employees' pay stubs.
When an employer makes the charged tips available to the employee may depend
on the employer's policy. The employee monthly tip report should include information
about charged tips that the employer has paid to the employee during the reporting
period, as well as tips paid directly to the employee.
It would be most practical for withholding purposes for the employer to
report the tip income for each employee when all the tip information is available
and the payments for charged items are available. If, when the employee is
paid, there is not enough money available to withhold all taxes owed on wages
and tips, the employer can withhold the remaining amount from the next paycheck
or the employee can give money to the employer to cover the withholding.
For more information, refer to Publication 15, Circular E, Employer's
Tax Guide and Publication 1872 (PDF), Tips on Tips - A
Guide to Tip Income Reporting for Employees in the Food and Beverage Industry.
References:
- Publication 15, Circular E, Employer's Tax Guide
- Publication 1872 (PDF), Tips on Tips - A Guide
to Tip Income Reporting for Employees in the Food and Beverage Industry
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