What Are Allocated Tips and How Do They Affect Your Taxes?

Allocated tips are those your company gives you on top of the ones you reported. This frequently occurs in big food and beverage venues where tipping is commonplace and when the tips you report drop below a specified percentage of your sales (usually 8%). Your company might assign you more tip income depending on your sales and the general tipping trends of the business, to exsure correct IRS reporting.

Box 8 of your Form W-2 shows these assigned tips. They are not part of your total wages (Box 1), though, and no Social Security or Medicare tax has been taken from them. That indicates you must declare the assigned tips on your tax return and pay the relevant taxes.

Doing this will require you to:

On your Form 1040, declare the assigned tips as income.

To compute and pay the required taxes on those tips, fill out Form 4137, “Social Security and Medicare Tax on Unreported Tip Income.”

Keeping a daily record of tips—cash and credit—helps you to properly declare your income and prevent inconsistencies. Not correctly declaring tip revenue could result in IRS fines and interest.

This entry was posted on Sunday, April 6th, 2025 at 3:40 pm and is filed under Deductions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.