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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 Form W-2 Wage and Tax Statement.

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 Social Security and Medicare Tax on Unreported Tip Income 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 U.S. Individual Income Tax Return.

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-downs for Box 12 in TaxAct).

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. TaxAct will figure the total amount of additional tax owed for social security and Medicare tax on your unreported tips, if any.

To enter unreported tip income:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Other Income in the Federal Quick Q&A Topics menu to expand, then click Taxes on tip income.
  3. Click Yes to enter or review your unreported or allocated tip information, then continue with the interview process to enter all of the appropriate information.

Related Links

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.

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