Tips

If you or your spouse received tips from customers in 2011, any tips that exceeded $20 in a single month should have been reported to your employer over the course of the year. The total amount of reported tips should be reported to you in Box 1 of your W-2 Form.

If, in addition to your reported tips, your employer allocated tips to you (as shown in Box 8 of your W-2) you generally must add these amounts to your Form 1040 Line 7 salary and wages. Allocation is done for employees of larger restaurants, bars, or similar businesses when an employee's reported tips did not equal at least 8 percent of the employer's gross sales that were attributable to you. When you add your allocated tips to your Line 7 wages, remember that FICA tax has not been paid on these tips. Therefore, you will also have to file IRS Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to compute and pay the FICA tax, and you will have to file IRS Form 1040 (not 1040A or 1040EZ).

You do not have to add your allocated tips in Box 8 to your reported tips in Box 1 (and pay the extra FICA tax on Form 4137) if you kept a daily record of tips in 2011. In that case, you can use your actual amount of tips, as shown in your tip diary or records.

Tip Technically, all employees who receive tips are supposed to keep a daily tip record - otherwise, how can they accurately report their tips to their employers each month? In actuality, the IRS recognizes that this recordkeeping duty is not always carried out. This is the reason that larger employers have to make a tip allocation. As an employee, you can save yourself from having to pay unexpectedly large amounts of taxes on April 15thif you carefully keep track of your tips during the year. All it takes is a notebook showing your name, the employer's name, and, for each workday, the date, amount of cash tips, amount of credit card tips, and amount of any non-cash tips. You can also use IRS Form 4070A, Employee's Daily Record of Tips, found in IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer. If you split your tips with other workers, you should also write down the names of the other employees and the amounts you paid to them.