Question: My Form W-2 shows allocated tips in box 8. I tip-out 15% of all my tips to the busser and 5% to the bartender. Do I deduct the tipped-out amounts on my tax return?
No. You do not deduct tip-outs (the tips you split with other employees) on your income tax return.
All cash tips you receive must be reported to your employer, unless the cash tips you received during a single calendar month total less than $20.
Cash tips include tips received from customers, charged tips (for example, credit and debit card charges) distributed to you by your employer, and tips received from other employees under any tip-sharing arrangement. Both directly and indirectly tipped employees must report tips received to their employer.
You are required to report your cash tips to your employer by the 10th of the month following the month you received your tips. For example, no later then December 10 for the tips received in the month of November. It is helpful to keep a record of amounts which you tipped-out to other employees so that you do not include these amounts in the report to your employer as part of your net tips. You report to your employer only the amount of tips you retain. Remember, you must include amounts you receive from other employees who tip-out to you.
You should keep a daily record of all tips you receive from customers and other employees. Recording the amount of tips you receive and the amounts which you tip-out will help you to maintain accurate records of your net tips. You can use Form 4070A, Employee's Daily Record of Tips, to keep a daily record of your tips, and Form 4070, Employee's Report of Tips to Employer, to report your tips to your employer. Both forms are in Publication 1244 (PDF), Employee's Daily Record of Tips and Report to Employer. Your employer may also provide other means for you to report tips, for example, a system for electronic tip reporting. Forms 4070 and 4070A provide lines to record:
- Cash tips received
- Credit and debit card tips received
- Tips paid out (tip-outs)
- Net tips
In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you receive, such as tickets, passes, or other items of value. Although you do not report these tips to your employer, you must report them on your tax return.
If your employer allocated tips to you, they are shown separately in box 8 of your Form W-2 (PDF). They are not included in box 1 with your wages and reported tips.
Allocated tips are tips that your employer assigned to you in addition to the tips you reported to your employer for the year. Your employer will have done this only if:
- You worked in a large food or beverage establishment (restaurant, cocktail lounge, or similar business), and
- The tips you reported to your employer were less than your share of 8% (or a lower rate approved by the IRS) of food and drink sales.
You must report all tips you received (including both cash and noncash tips) on your tax return. Even if box 8 of your Form W-2 contains an amount for allocated tips, you are not required to report allocated tip income if you did not receive it. But you must be able to prove the amount of tips you actually received with adequate records. If you do not have records or have inadequate records, you must report the amount in box 8 as income on your tax return. You cannot deduct any amounts you tipped-out to other employees from the amount shown in box 8.
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