Deducting tips from W2 wages when employer won't issue a corrected w2

[musicnyc]

I have seen similar questions asked before, but in my downloaded TurboTax Deluxe I do not get asked any questions about tip deductions after importing my company's W2.  The "uncommon situations" page only lists "Unreported Tips" as an option, but my tips are already included in Wages Box 1, so they are not unreported.  Where can I deduce the direct gratuities I found on my final 2025 paystub from the W2 wages so I do not pay tax on them?

[rjs · Accepted solution]

On your W-2, tips should be included in the wages in W-2 box 1, and shown separately in box 7. If your tips are included in box 1, but not shown separately in box 7, the W-2 is not filled out correctly.

If the employer refuses to correct the W-2 you will have to include a Form 4852 substitute W-2 in your tax return. When you enter the W-2 in TurboTax, enter the correct information instead of what's on the W-2 from the employer. That means you will subtract the amount of tips from box 3 (not from box 1) and enter the amount of tips in box 7.

After you enter the W-2 information, you will get a screen that says "Let's check for uncommon situations." Check the box for "Didn't get a W-2" (even though that's not your situation) and click Continue. The next screen asks if you want to complete a substitute W-2. Select Yes. Proceed through the screens, entering the requested information to complete Form 4852. It will ask you to enter explanations of what you did to try to get a correct W-2 from your employer, and how you calculated the amounts that you entered. The prompts on the TurboTax screens assume that you didn't get a W-2 at all, but that's not what the actual Form 4852 says. The form says to explain your efforts to obtain an original or corrected Form W-2, and how you determined the amounts that you entered. TurboTax will include the Form 4852 substitute W-2 in your tax return.

After you complete the substitute W-2 TurboTax will ask you questions to determine if you are eligible for the deduction for tips.

You should not enter the tips as unreported tips. If you do that your tax return will include Social Security and Medicare taxes on the unreported tips. But you already paid those taxes. You don't want to pay them again.

[musicnyc]

Thank you for the swift reply.  Oh boy, will all this extra explanation and forms trigger a letter from the IRS to me?  Would love to avoid that...

[rjs]

It's only one additional form. I doubt that it will trigger an IRS letter. No one really knows exactly what makes the IRS question a tax return, but there's a lot of confusion about tips this year because of the new deduction. The IRS knows that a lot of employers are not going to do it right.

You could reduce the chances of getting a letter from the IRS by reporting the W-2 as-is and not claiming the deduction for tips. But then you'd be paying tax on all your tips. That's a pretty expensive way of trying to avoid something that might not happen anyway.

Keep whatever records you have of your tips for 3 years, just in case you do get a letter. Would your employer be willing to give you a statement showing the tips that are included in box 1, without actually correcting the W-2? That would help in the event the you do get a letter from the IRS.

[musicnyc]

I'm going to try again for a corrected W2 from my HR dept.  I don't think they appreciated the scope of this issue.

But for proof I do have my 2025 end-of-year paystub that breaks out the Direct Gratuities portion of my income onto a separate line.

Thank you for all the information and advice.