Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Income

Tip Income

Allocated Tips

To ensure that everyone reports their fair share of income from tips, some employers have tip allocation programs. These programs are approved by the IRS. If an employee reports tips to the employer that were less than the designated share based on the employer’s formula, the employer reports the difference as "allocated tips" and includes it on the employee’s Form W-2.

Allocated tips are shown separately in Form W-2, box 8. Social security and Medicare taxes are not withheld on allocated tips. They are not included in the amount in Form W-2, box 1. Allocated tips must be included in Form 1040, line 7 unless taxpayers:

  • Kept a written and reliable tip record
  • Can prove the allocated amount is inaccurate.
Form W-2: Wages, tips, other compensation equals $26,500 and allocated tips equals $11,362.