Tips - Reported, Unreported, and Allocated
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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:

  1. Keep a daily tip record.
  2. Report tips to your employer.
  3. Report all your tips on your income tax return.

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 1 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).

Steps

See Entering in Program - Form W-2.

If you didn't 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 didn't report them.

To enter unreported tip income:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal
  2. Click Other Income to expand the section, then click Taxes on tip income
  3. Click Yes to enter or review your unreported or allocated tip information. TaxAct will figure the total amount of additional tax owed for social security and Medicare tax on your unreported tips, if any.

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