All you have to do is reduce that tip income that you are reporting. For example, if you receive a $1000 tip and give bartender $250, you only need to report $750 as your tip income. 

When you enter your W-2 form, be sure to select box Unreported Tips when you see the screen Do any of these uncommon situations apply to this W-2... and continue through the prompts. On the Tips Not Reported to (employer name) screen, answer the question about your tips. On the Enter Any Tips You Didn't Report to (employer name) screen, enter the amount of your tips.

This link shows you exactly how to report it... the data entry is immediately after you enter your W-2 form:

https://ttlc.intuit.com/questions/1899731-entering-unreported-tips

If you'd like,  more information on tip income:

https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/How-to-Claim-Tips-on-Your-Tax-Return/I...

This isn't regarding tips reported to the employer.  Is the tip out amount going unreported? Your total gross income is including your tip out, correct? What about line 21 is that a box to add total tipout for the year?

Your employer is supposed to deduct tip-outs on your W-2.

If that is not done, you're on the hook for that tax on that.

So there is no way to not pay the tax on the tipped out amount.

From what I was told from an Intuit employee is that you can only report payout income you receive from other employees not payout expenses you give out.  Is that double dipping by the IRS or what?  

This is what they sent me from the IRS

"If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Don't report on your income tax return any portion of the tips you receive that you pass on to other employees. However, you must report tips you receive from other employees."

Anyone clear on this???

Yes. TurboTax allows you to deduct tip outs from your allocated tips. You are only taxed on the tips you actually keep.

Here's what to do:

1. After you enter your W-2 in TurboTax, you will the screen "Let's check for uncommon situations."
2. Select Unreported tips, then continue
3. On "Let's confirm your allocated tips from xxxx" select Yes or No, depending on whether your allocated tips are correct
4. On "Now let's enter your unreported tips," enter the amounts of Total tips that you paid out through tip-sharing

@iemak 

This is great information. What about if I don't have unreported tips (all tips reflected in W2), but W2 does not reflect tips paid out through tip sharing? When I tried to enter $0 for unreported tip income and the amount I paid out to tip pools (bar, support staff, etc.), I get an error - All unreported tips should not be less than the tips paid out through a tip sharing arrangement. Appreciate any help you can provide.

Leave those boxes blank and only enter an amount in the tip-out box (Total tips that you paid out through tip sharing).

@TennisBrad1 

That's what I thought also, but the program itself will not allow that single entry.  Give it a try, you'll see it makes sense to do exactly what you say but it doesn't accept it when you do your final check it comes up with an error and you have to put it back to 0 to get rid of the error. 

Your system will not allow me to do this. I was on a chat line (as I upgraded my TurboTax) & they could not help 

Did you ever figure this out? I got screwed last year, and I’m trying to make sure this doesn’t happen this year. Every time I clock out, I’m claiming more than I walk with, because of tip outs (most sales are credit, and our tip outs are high). It’s so frustrating paying taxes on money I don’t get to keep. 

Your employer is supposed to report your net tips, after tip-outs.

@DebbyOhara 

In your situation, see Form 4852, which alllows you to report the correct tip compensation after contacting the IRS to inform them that you attempted to get a corrected W-2c from your employer but were unsuccessful.

@DebbyOhara .

This is the question but where is the answer