Tip reporting

[fionajean6477]

I was paid credit card tips on my paycheck to which I was taxed on . However, when I received my w-2 from ex employer it only gave my wages. I contacted them and I was sent a print out of my paychecks where it shows tip amounts and taxes that were taken out. How do I claim this on my taxes? 

[Vanessa A]

To enter your tips you will need to enter your W-2 and include the amount you received in box 7.  Entering the amount inbox 7 will trigger the rest of the questions after you hit continue when done entering your W-2.

In order to claim tips, the following must apply:

• The tips MUST be reported.  If they are not reported on a form to the IRS you cannot claim them for the no tax on tips deduction.
  • If employed they need to be reported on your W-2 or form 4137
  • If self-employed, they must be reported on a 1099.  If you received them as cash, they are not deductible. 
• Your income must be below $150,000 if you are single or less than $300,000 if Married Filing Jointly.  Above these amounts, the deduction starts to fade out and is not available at all for those with income over $400,000 for single and $550,000 for Married Filing Jointly.
• You can not claim this deduction if you are Married Filing Separately
• You receive tips from an occupation that normally and customarily receives tips

If all of the above apply, TurboTax will generate a Schedule 1-A for your return.  This amount will be deducted from your AGI. Remember, this is a deduction NOT a credit.  This means it will lower your taxable income, which can lower your tax liability.  You will  NOT see a refund in the amount of the Tips you enter. Tips are reported on Schedule 1-a, Part II with the total amount you are qualified for reported on line 13 of Schedule 1-A.

If you are getting the deduction and have income left to reduce, you will see the change to your income on line 11a of your form 1040.  If your AGI is lower than your tips  your benefit from the deduction will be limited to your AGI before the deduction. 

To see your form 1040 you can switch to forms mode if you are using TurboTax Online or if you are using the online version you can select Tools>>Tax Tools>> Preview my 1040.

 This is the "learning year" for all the new changes and not all companies are reporting things the same way yet.  Box 7 is not a box that the IRS generally uses for anything.  They are most concerned with box 1 and 2 and then the rest of your forms that are filled out and filed. 

  If you want to ask for a corrected W-2, it would not hurt.  Some employers will, others won't.  But, if you have one that won't, just file using the above steps. 

[malenasdad]

The respondent said "The tips MUST be reported.  If they are not reported on a form to the IRS you cannot claim them for the no tax on tips deduction."  

Hmm????  That's seems incorrect.  If you worked in a qualifying tipped occupation, and your tips otherwise qualify for deduction, you are entitled to a deduction.   

If the tips are not properly disclosed on the W-2, box 7, then your employer completed the form incorrectly.  Your best option is to ask the employer to issue an Amended W-2... or maybe its called a Corrected W-2.  I am not sure.    Anyway, your employer may need to (and should probably) issue amended W-2s for all tipped employees.  (He's not going like you for raising the issue... but that's not your problem.)  

If the employer will not issue an amended W-2, legally your are still entitled to the tip deduction.  It part of the law.  A work around would be to  merely deduct your allowable tips from social secuity wages (box 3) input form on turbo tax and input them in as social security tips (box 7).  This should should "trick" the system for purposes of claiming the tip deduction and filing your retrun.  A word of caution, though... the IRS may send you a love letter, asking you to explain why the tips deduction on Schedule 1-A does not agree with the Form  W-2, box 7.  This is not an audit!  Its just a query,  You should be able to simply reply to the letter, explaning how the tips were not properly reported by your employer, and provide the IRS a copy of you final paystub showing the total annual tips.  

Of course my suggested work around will result in addition correspondence, all of which is a pain and, besides, most people are afraid of IRS love notes.    Best to get your employer to issue an Amended W-2..  Think of this as your chance to educate him of the finer points of tax law.  

Anyway, that's me two cents worth,  

[DianeW777]

Yes, that is correct and state by our tax expert @Vanessa A. If you have your pay stubs and a reliable record to arrive at the total allowable tips you can take the deduction even if your employer did not report them on your W-2. 

In order to claim tips, the following must apply:

• The tips MUST be reported.  If they are not reported on a form to the IRS you cannot claim them for the no tax on tips deduction.
  • If employed they need to be reported on your W-2 or form 4137
  • If self-employed, they must be reported on a 1099.  If you received them as cash, they are not deductible. 
• Your income must be below $150,000 if you are single or less than $300,000 if Married Filing Jointly.  Above these amounts, the deduction starts to fade out and is not available at all for those with income over $400,000 for single and $550,000 for Married Filing Jointly.
• You can not claim this deduction if you are Married Filing Separately
• You receive tips from an occupation that normally and customarily receives tips

The Tips deduction question applies to both TurboTax Desktop and TurboTax Online. 

After you complete the W-2 information you will reach a screen:

1.  'Let's check for other situations', select the checkbox next to 'Tips not reported on my W-2'. 
2. Once this is completed TurboTax will walk you through the remaining questions about your tips. 
3. The next screen is 'Now let's enter your unreported tips'.
   • What's the new tax law for for tips?
   • No Tax On Tips: How it Works in the One Big Beautiful Bill

From the left rail menu in TurboTax Online, select Tax Tools (You may have to scroll down on the left rail menu.)

1. Select Tax Tools
2. On the drop-down select Tools
3. On the pop-up menu titled “Tools Center”, select View Tax Summary 
4. On the left sidebar, select Preview my 1040 

For TurboTax Desktop, change to 'Forms' and review the forms 

The deduction is reported on Schedule A-1 (new for 2025).

@malenasdad 

[malenasdad]

I agree, the tips should be included in income in order to claim a deduction.  Generally this means the tips will be included in Box 1 of the employer provider W-2.  

The point of my post, however, is even if the employer did not also report the tips in Box 7, a taxpayer is still entitled to deduct them from taxable income.  In other words, a taxpayer should not be unnecessarily burdened just because his or her employer made a reporting error.

This issue arose as I was helping my daughter with her tax return, which were reported incorrectly.  I’m a recently retired CPA with 42 years of high level tax planning experience.  Early in my career I dealt with a  multitude of errors on information returns (W-2s, 1099s, etc).  In cases where an information return was incorrect, and the person who prepared it was not willing to correct it, a taxpayer should sill be able to report the properly taxable amounts.  

When I encountered this situation in  my work life, we prepared reconciliations and attached them to the filed return.  I’m accustomed to using professional tax prep software, however, and find TurboTax a bit (actually, a lot) clunky as far as flexibility.  Oh well.