All tips you receive are subject to federal income tax. This means the income you report on your tax return must include tips you receive directly, charged tips your employer pays to you, and tips you receive in a splitting or pooling arrangement. Generally, your tip income is included in the amount reported to you in Box 1 of your W-2.
According to the IRS, you must:
If you have not done either of the first two items above, you may need to meet additional reporting requirements on your tax return. For more information, see IRS Publication 531 Reporting Tip Income.
Allocated tips are tips your employer assigned to you in addition to the tips you reported to your employer for the year. If your employer allocated tips to you, that amount will appear in Box 8 of your W-2. No income, social security, or Medicare taxes are withheld on allocated tips. These taxes must be figured on Form 4137 using the amount from Box 8 (see below for information on entering Form 4137 in TaxAct®).
TaxAct will automatically add the amounts you enter for Box 8 to those entered as wages for Box 1. This total amount will then appear on Line 7 of your Form 1040.
If your employer did not collect all social security and Medicare taxes you owe on tips, the amount may be shown in Box 12 of your W-2 (Codes A and B in the drop-down menus for Box 12 in TaxAct).
To enter information from your W-2:
If you did not report tips to your employer as required, you may be charged a penalty equal to 50% of the social security and Medicare tax due on those tips. You can avoid this penalty if you can show that your failure to report tips to your employer was due to reasonable cause and not due to willful neglect. To do so, you can attach a statement to your return explaining why you did not report them.
To enter unreported tip income: