If a waiter's W-2 includes all of his tips and he has to tip out to support staff, is there a deduction for this. I am finding mixed messaging on my research. Some say manually decrease the W-2 amount reported, which would cause a mismatch with IRS. Some say it is an itemized deduction. Calling it unreimbursed employee expense which was eliminated with TCJA. Any help would be appreciated. Thanks, Lisa
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"If a waiter's W-2 includes all of his tips"
In Box 7 or Box 8? It makes a difference."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard -
The W-2 should NOT include his gross tips, it should only include the net tips (after tip-outs).
Is the employee reporting things incorrectly to the employer? Or is the employer doing something wrong?Comment
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I think the employer is doing it wrong because the employer sent the waiter a letter stating what his tip outs were and told him that they could possibly help on his taxes.Comment
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You first need to check with the client to confirm that he is reporting it correctly to his employer, (either reporting ONLY his net tips, or reporting BOTH his gross tips AND his tip-outs).
If that was done, then the client needs to ask the employer to correct the W-2.
If the employer won't do that, then file Form 4852 with the tax return reporting the correct amounts.
But as Robert mentioned above, if there is an amount in Box 8 of the W-2, that may change things.
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My recollection from many years ago when I was teaching this topic to new tax preparers... (and confirmed in Pub 531.)
If every employee follows the rules and reports their net tips to their employer, then the amount is reported in both Box 1 and Box 7 and no adjustments are needed.
However if some or all of the employees do not timely and correctly report their tips, then you get Allocated Tips in Box 8, which are not included in Box 1 and require special handling, such as calculating the uncollected FICA tax and possible adjustment for tip-outs.
"If the employer won't do that, then file Form 4852 with the tax return reporting the correct amounts."
I think Form 4137 is the correct way to handle it, not 4852. It handles both the wage adjustment and FICA tax.
"I am finding mixed messaging on my research. Some say manually decrease the W-2 amount reported, which would cause a mismatch with IRS. Some say it is an itemized deduction"
Pub 531 should answer all your questions. Not sure why that would not be your primary source for research.
"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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Form 4137 is if the W-2 does not show enough of the tips. But the OP seems to indicate that the W-2 shows too much tips, so that needs to be done via a corrected W-2 (or a 4852).
It has been a while since I've looked into allocated tips, but I think that only comes into play if the employee reports tips lower than a certain percentage.
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"You first need to check with the client to confirm that he is reporting it correctly to his employer, (either reporting ONLY his net tips, or reporting BOTH his gross tips AND his tip-outs)."
Yes, agree."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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"Form 4137 is if the W-2 does not show enough of the tips"
I've used it to show a lesser amount than what was shown in Box 8. I think this is the most common scenario, where the tips were all "allocated" to the front of the house staff, but there actually were tip-outs going on."You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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I'm looking at the 4137 and I can't figure out how that could be used to report LESS tips. It completely seems to be set up for only adding more income and tax.Comment
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"I can't figure out how that could be used to report LESS tips"
Real life example: W-2 shows $1,775 in Box 7 and $9,250 in Box 8.
Form 4137 shows (for the same W-2) an amount of $5,250 in Line 1 col (c) and $1,775 in col (d). Total unreported tips is [$5,250 - 1,775 = $3,475]. This is much less than the $9,250 that would apply by default from Box 8.
Note these instructions for W-2 Box 8 entry on Form 1040. Box 8 is by default added to wage income and subject to FICA tax on the 1040. The first step to "proving" that your unreported tips are less than the amount in Box 8 is to fill out Form 4137.
"Tip income you didn't report to your employer. This should include any allocated tips shown in box 8 on your Form(s) W-2 unless you can prove that your unreported tips are less than the amount in box 8. Allocated tips aren't included as income in box 1. See Pub. 531 for more details. Also include the value of any noncash tips you received, such as tickets, passes, or other items of value. Although you don’t report these noncash tips to your employer, you must report them on line 1.""You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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Originally posted by Rapid Robert View Post
Okay, I see what you are saying that you can declare less tips than the "allocated" tips because the 4137 is used to add tax to the allocated tips (they are not in Boxes 1, 3, 5 or 7 of the W-2). Personally, I've never even seen "allocated" tips, so thank you for refreshing my mind for how that works.
But that does not apply to any 'regular' tips that are already reported in Boxes 1, 3, 5 and 7 of the W-2 (which is what I interpret the OP was asking about), So 4137 can't be used to reduce non-allocated tips.Comment
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