My Form W-2 includes allocated tips. What are they and how are they taxed?
Certain employers must allocate tips if the percentage of tips reported by employees falls below a required minimum percentage of gross sales. To “allocate tips” means to assign an additional amount as tips to each employee whose reported tips are below the required percentage. For additional information on how the rules for tip allocation work, refer to Chapter 7 of Publication 17, Your Federal Income Tax. All tips you receive are taxable. If you don’t have adequate records for your actual tips, you must include the allocated tips shown on your Form W-2 as additional tip income on your return. You must also complete and attach Form 4137, Social Security and Medicare Tax on Unreported Tips. For more information on the requirements, refer to Tip Allocation in Publication 531, Reporting Tip Income. Return to index . . .
