Tips Subject to Other Taxes (continued)
An employer may "allocate" tips to an employee if the employee worked in a restaurant, cocktail lounge, or similar business, and reported tips that were less than the employee's share of 8% of food and drink sales. If the employer allocates tips to employees, the amount is reported on Form W-2, box 8. This amount is to be included in income on Form 1040. However, social security and Medicare taxes are not withheld from allocated tips. The employee pays the social security and Medicare taxes by completing Form 4137, Social Security and Medicare Tax on Unreported Tip Income.
If the employee can show, using Publication 1244, Employee's Daily Record of Tips and Report to Employer, or some similar daily tip record, that the actual tips received are different from the allocated amount, then the actual amount is reported on Form 1040. The actual tips received are also reported on Form 4137 to calculate social security and Medicare taxes.