Employers taxing full tips

[slaterfamily5]

I am a server. We report our tips each night but take a% of our tips to tip out support staff but our employer taxes us as if we took it all home.  We don’t take home all of the tips that are reported. Are they allowed to do this?The tips we give out to support are like free cash to them because they don’t report it but we end up paying the tax on it.

[Carl]

you mean the 10% cut that goes to the busboys? You pay tax on that, not the busboys. That's how it goes. It's nowhere near close to being taxable to the busbuys, unless you're making about $5K in tips each night. Been that way for the 50 plus years I've been alive. If that's an issue, then you can always seek the services of a tax attorney. But would be more effective to bus your own tables really.

[Hal_Al · Accepted solution]

The simple answer is you are not allowed to deduct "tip-outs". The real answer is only slightly more complex. 

There are three ways tips are reported, by employees*, for tax purposes:

1. Box 7 of your W-2. This is the amount you reported to your employer and is already included in box 1 of your W-2 as taxable income. It cannot now be adjusted for tip outs. Your employer was suppose to have already done that. If you believe it's incorrect, you have to ask your employer for a corrected W-2 (that's unlikely to happen).

2. Box 8 of your W-2. This is "allocated tips". The IRS requires your employer to assume you got this much more  in tips, if the amount you reported doesn't meet an IRS standard. This will be added to the amount in box 1, as income, and go on line 7 of form 1040. This also cannot be adjusted for tip-outs (see https://www.irs.gov/faqs/interest-dividends-other-types-of-income/tips/tips ).

However you are allowed to claim an adjustment (see below**), if you believe the amount to be incorrect. But this will invite IRS scrutiny.

3. Unreported tips. These are not already on your W-2. You input it yourself (see https://ttlc.intuit.com/questions/1899731-entering-unreported-tips ). You may deduct tip-outs from the amount your report.

**Allocated Tips. If TurboTax (TT) detects an amount in box 8 of the W-2, it will already have checked "Unreported Tips" at the screen titled "Do any of these uncommon situations apply to this W-2". If not, you should check it. That will take you to a screen where you can enter the correct amount. In your case, you would enter an amount, equal to your tip outs,  less than the box 8 amount in the adjustments box. For example if box 8 was $3000, and you gave the staff $1300, you would enter $1700 in the adjustments box.

*People who work for tips only (no W-2 wages), report their tip income as self employment income.

[Critter]

Tip outs should never be on your W-2 in the first place.  You should only report to your employer tips you actually keep, and don't report tips you share out.  There is no procedure on the tax return to fix this.  

[Carl]

Critter, unless something changed with the TCJA, there is an "expected" amount of tip a server is required to claim/report weather they actually make that much in tips or not, and it's required to be included in box 1 of the W-2. I's an IRS thing and I'm to lazy right now to go searching for the pub. I do know the number is rather low and the only way a server would not meet that minimum is if they were a really bad server - which means they wouldn't last long in the industry anyway.
But if you'll look at the label for box 1 of the W-2, it's labeled "Wages, Tips, Other Compensation".  Then box 7 is labeled "Social Security Tips" while box 8 is "Allocated Tips". I don't recall the difference between boxes 7 and 8 though.

[Carl]

I know back as a busboy in the '70's the servers that worked the section I bussed had to give me 10% of their tips for the shift. For me, that 10% was included in box 1 of my W-2, and I don't recall anything ever being in box 7 or 8 of my W-2. I think that's because I was paid minimum wage while the server's were not. So the servers were subject to that "allocated tips" minimum rule, while I was not. Besides, my 10% cut would never come close to any minimums anyway. But my point is, as a busboy I was taxed on the cut of the tips I received. I can only assume the servers were not taxed on what they passed to me.