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2005 Tax Year |
Keyword: Allocated Tips
This is archived information that pertains only to the 2005 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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 (PDF).
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 lines to record:
- Cash tips received
- Credit card tips received
- Tips paid out
- Net tips
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.
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.
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.
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