Box 8 on Your W-2: What Are Allocated Tips?

Discovering an amount in Box 8 of your Form W-2, labeled “Allocated Tips,” can be confusing. This figure represents income your employer has assigned to you that you may not have tracked yourself. Understanding what this amount means is the first step toward correctly handling it on your tax return.

Understanding Allocated Tips in Box 8

The amount in Box 8 of your W-2 is a share of tips your employer has assigned to you, separate from the tips you reported throughout the year. Allocated tips appear for employees of large food and beverage establishments that employ more than ten people on an average business day.

This allocation occurs when the total tips reported by all employees at an establishment fall below a threshold set by the IRS, which is 8% of the business’s total sales. If reported tips are less than this 8% figure, the employer must distribute the shortfall among the employees who receive tips.

Allocated tips in Box 8 are not included in your total wages in Box 1, Social Security wages in Box 3, or Medicare wages in Box 5. This is because your employer did not withhold any income, Social Security, or Medicare taxes from this specific amount.

Tax Implications of Allocated Tips

Allocated tips from Box 8 are considered taxable income by the IRS and must be included in your total gross income. Failing to report these tips can lead to a penalty of 50% of the Social Security and Medicare tax you fail to pay on them.

Because your employer did not withhold taxes on this income, you are responsible for paying the associated taxes directly. This includes federal income tax and the employee’s share of Social Security and Medicare taxes, often called FICA taxes, when you file your return.

How to Report Allocated Tips on Your Tax Return

When preparing your tax return, you must add the allocated tips from Box 8 to your other wages and income. This combined figure is included on Line 1 of your Form 1040.

Next, you must calculate the Social Security and Medicare taxes owed on these tips using Form 4137, Social Security and Medicare Tax on Unreported Tip Income. On this form, you will enter the allocated tips from Box 8 to calculate the 6.2% Social Security tax and 1.45% Medicare tax due.

The total tax calculated on Form 4137 is carried over to Schedule 2, “Additional Taxes,” which is filed with your Form 1040. This step ensures the FICA taxes on your allocated tips are included in your total tax liability for the year.

If you have a detailed daily log of your tips and can prove your actual tip income was less than the amount in Box 8, you may report the lower amount. You would still complete Form 4137 using your documented tip amount and attach a statement to your tax return explaining the discrepancy. Without adequate records, you must report the full amount shown in Box 8.