You must report tips you received (including both cash and noncash tips) on your income tax return. Any tips you reported to your employer are included in the wages shown in box 1 of your Form W-2, Wage and Tax Statement. Add to the amount in box 1 only the tips you didn’t report to your employer as required. This should include any allocated tips shown in box 8 on your Form(s) W-2, unless you have adequate records to show that you received less tips in the year than the allocated amount.
If your employer allocated tips to you, the allocated tips are shown in box 8 of your Form W-2. The allocated tips aren't included in box 1 with your wages and reported tips.
Allocated tips are amounts your employer assigned to you in addition to the tips you reported. Your employer is required to allocate tips only if:
- You worked in a large food or beverage establishment (restaurant, cocktail lounge, or similar business),
- You received any tips directly from customers, and
- The amount of tips you reported to your employer was less than your share of 8% (or a lower rate approved by the IRS, if your employer requested it) of food and drink sales.
Generally, you must report the full amount contained in box 8 of your Form W-2. However, you don't report the entire allocated tip amount on your income tax return if you can prove with adequate records that the amount of tips you actually received was less than the allocated amount. You should keep a daily record of all tips you receive from customers and from other employees who tip out to you and the amounts you tip out to other employees. If you don't have records or if you have inadequate records, you must report the full amount in box 8 as income on your income tax return.
Use Form 4137, Social Security and Medicare Tax on Unreported Tip Income to figure any social security and Medicare taxes on allocated tips. Use Form 8959, Additional Medicare Tax to figure any Additional Medicare Tax.