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.
Enter your tips with the employer's W-2
To enter your tips:
- Open or continue your return in TurboTax, if you aren't already in it
- Search for W-2 and select the Jump to link in the search results
- If that employer's W-2 was already entered on the Your W-2 info so far screen, select Edit next to that employer
- If you haven't entered that W-2 yet, follow the on-screen instructions or select the Add a W-2 button to add the employer
- Enter information from the W-2 as needed and select Continue until you reach the Let's check for uncommon situations screen
- Select the box for Unreported tips and select Continue
- On the Now let's enter your unreported tips screen, enter the amount of your tips
What if I reported tips to my employer, but my employer did not include them on my W-2?
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.
Politely inform your employer that you need to report the missing tips on your return to avoid problems with the IRS. Let them know you'll send 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 form.
If your employer won't budge:
- Enter the unreported tips as explained in this article. 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 printed and mailed.
- 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.