Entering unreported tips
Because tips are income, they need to be reported on your tax return. Normally, you would report your tips to your employer, who then includes them on your W-2. Whether included on your W-2 or not, enter your tips in TurboTax with the employer's W-2.
To enter your tips with the employer's W-2:
- Open your return in TurboTax, if you aren't already in it.
(To do this, sign in to TurboTax and click the orange Take me to my return button.)
- Search for w-2 (with or without the dash)
- Click on the Jump to w-2 link in the search results.
- If that employer's W-2 was already entered – on the Here's your W-2 info screen, click Edit next to that employer.
If you haven't entered any W-2's yet, then follow the on screen instructions, or click the Add a W-2 button to add this employer.
- Enter the information from the W-2, then press Continue at the bottom and follow the next screens.
- On the Do any of these uncommon situations apply to this W-2? screen, check the box for Unreported tips - I got tips that I didn't report to (employer name), and then click the Continue button.
- 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.
Ask your employer for a corrected W-2 (Form W-2C) that includes the tips you reported to them.
If your employer refuses your request, they may be trying to avoid paying payroll taxes on the omitted tips. Unfortunately, this shifts their payroll tax responsibility to you.
Politely inform your employer that you need to report the missing tips on your return to avoid problems with the IRS. You'll also be sending an explanatory letter to the IRS so you don't get stuck paying your employer's payroll taxes. Hopefully your employer will quickly figure out that it's in their best interest to issue a corrected W-2.
If your employer won't budge:
- Enter the unreported tips as explained above. TurboTax will automatically create Form 4137, Tax on Unreported Tip Income.
- Finish your return as usual, but do not e-file it. It must be paper-filed by mail.
- Create an explanatory letter for the IRS. Your letter should mention that:
- You reported the correct tips to your employer;
- Your employer didn't include the full amount of tips on your W-2;
- Your employer refused to issue a corrected W-2;
- You kept records of your tips.
- Include the letter with your return when you mail it to the IRS. (Be sure to keep a copy of the letter with your tip records and a copy of your tax return.)
The IRS will then contact your employer about collecting payroll taxes and perhaps discuss penalties for failure to report employee tips.
You want to do this because if the IRS finds out you have income not reported on the tax return you signed, they'll come to you for additional taxes and penalties.