Tips - Reported, Unreported, and Allocated

Per IRS Publication 531 Reporting Tip Income, page 2:

All tips you receive are income and are subject to federal income tax. You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement.

The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to tax.

Reporting your tip income correctly isn’t difficult. You must do three things.

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

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Penalty for not reporting tips. If you don't report tips to your employer as required, you may be subject to a penalty equal to 50% of the social security, Medicare, Additional Medicare, or railroad retirement taxes you owe on the unreported tips. (For information about these taxes, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, later.) The penalty amount is in addition to the taxes you owe.

You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. To do so, attach a statement to your return explaining why you didn’t report them.

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CAUTION If you didn’t keep a daily tip record as required and an amount is shown in box 8 of your Form W-2, see Allocated Tips, later.

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What are allocated tips? These 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 an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees, and
  • The tips you reported to your employer were less than your share of 8% of food and drink sales.

No income, social security, Medicare, Additional Medicare, or railroad retirement taxes are withheld on allocated tips.

To report the Form W-2 you received in the TaxAct program, go to our Form W-2 - Entering in Program FAQ.

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).

To enter unreported tip income in the TaxAct program, go to our Form 4137 - Tip Income - Social Security and Medicare Tax FAQ.

Related Links

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