I'm not sure there is a problem. The instructions for the W-2 say box 1 is for total wages including tips reported by the employee, while box 7 is for tips alone. If you were in a tipped position, your tips would be listed twice, so I don't think box 7 changes your tax, it seems to just be a reporting requirement for some reason. In your case, the employer is charging a service charge but reporting it as tips; I don't think this is technically correct, but I don't think it hurts you, because I don't think box 7 tips change your tax (since they are already in box 1 and box 5). However, someone else may have more expertise.
On further reflection, the employer may be under-reporting your social security wages. If the service charges are included in the box 1 wage amount, the box 5 medicare wage amount, and box 7 the tip amount—but not included in box 3 social security wages—then the employer is under-reporting social security. That saves him 6% of the amount of service charge reported as tips, it also saves you 6% of the amount of service charge reported as tips, and it slightly reduces your retirement credits at the social security administration.
@DoninGA @Hal_Al @VolvoGirl ????
