Quote:
Originally Posted by Bill14564
Not exactly.
All tips received by the server should be reported by the server to the employer, taxed as wages, and included on the W-2. It might be that tips on credit cards are automatically considered to be reported without any other action of the employee but I haven't looked into that. All tips *should* be reported and taxed but that doesn't always happen.
Allocated tips on the W-2 are something different. Allocated tips are based on 8% (usually) of a restaurant's gross receipts. The total amount is allocated to each tipped employee based on an IRS formula. The allocated amount on the W-2 is the difference between their reported amount and their portion of the 8%. The employee has the choice to pay taxes on their allocated amount or to provide evidence that they did not receive that amount.
IRS: Tip Recordkeeping & Reporting |
While technically correct, I suspect that there is a lot of underreporting of tips to the employers, and the employers rely mostly on the allocated tip calculation to report tip income. Note that the allocated tip amount on the W-2 is added to the total wages and is therefore taxed for the FICA taxes.