Allocated tips are tips that your employer assigned to you, in addition to the tips you reported. This may occur if you work in a restaurant, cocktail lounge, or similar establishment that must allocate tips to employees, and when the tips you reported to your employer are less than your share of 8% of food and drink sales.
These allocated tips are shown separately in box 8 of your Form W-2 and are not included in the total in box 1. Allocated tips are calculated by subtracting the total tips reported by all employees from 8% of total food and drink sales. Your proportionate share of that amount is calculated based on an agreement between the employer and the employees, or according to an IRS method, based on the employees’ sales or hours worked.
Do You Have to Report Allocated Tips?
You must report allocated tips on your tax return unless one of two exceptions applies.
You kept a daily tip record or other evidence that is as credible and reliable as a daily tip record.
Your tip record is incomplete, but it still shows that your actual tips were more than the tips you reported plus the allocated tips.
If one of the two exceptions applies, you should report your actual tips and exclude the allocated tips from box 8 of your W-2.
How To Report Allocated Tips
If you have to report allocated tips, add the amounts in boxes 1 and 8 of your Form W-2 and report the total on the wages, salaries, tips, etc. line (line 7) of Form 1040. You cannot use Form 1040EZ or 1040A in this case.
Since social security and Medicare taxes were not withheld from the allocated tips, you will have to calculate these taxes on Form 4137.