TaxBandits Knowledge Base

How to Report Allocated Tips in Form W-2?

Accurate reporting of these amounts on Form W-2 is important when allocating tips to employees. Here's how to do it:

1. Determine the Allocated Tips:  If the amount on line 6 of Form 8027 exceeds the amount on line 4c (total tips reported), the excess must be allocated as tips to the directly tipped employees working in the establishment.
    
2. Allocation Method:  Choose the appropriate allocation method used to distribute the tips. The IRS provides several methods to allocate tips, such as the hours-worked method, gross receipts method, or good-faith agreement method. Be sure to indicate the method used by checking the corresponding box on Form 8027.
    
3. Report Allocated Tips on Form W-2:  Once you’ve allocated the tips, show the total amount allocated to each employee in Box 8 of the employee’s Form W-2. This amount represents the tips the employee was allocated but may not have received directly.
    
4. Employee’s Responsibility:  The allocated tips are part of the employee’s gross income, and they must report these tips on their tax return, even though they may not have been directly received.