CashoutGlossary / Allocated tips
Allocated tips
Tips a large restaurant assigns you in W-2 box 8 when staff reported under 8% of sales. It's an estimate you must deal with, not a payment.
Allocated tips are an estimate, not money. An employer that runs a large food or beverage establishment, one that files Form 8027, must allocate tips when the tips its employees reported for a period come to less than 8 percent of gross receipts. The gap is spread among directly tipped employees, like servers and bartenders, whose own reports came in short. Indirectly tipped staff, like bussers and cooks, get no allocation.
The amount shows in box 8 of your W-2. It isn't in box 1, and no income tax, Social Security or Medicare was withheld on it. You report allocated tips as income, and figure the Social Security and Medicare tax on Form 4137, unless you have adequate records showing you got less.
The employer chooses one of three methods: a written good-faith agreement with at least two-thirds of the tipped employees in each category, the gross receipts method, or for smaller places the hours-worked method. With IRS approval the 8 percent rate can be lowered, but never below 2 percent.
The common mistake is ignoring box 8 because the money never came from your employer. The IRS expects it on your return unless your records prove a smaller number. A daily tip log kept through the year is what lets you report your real tips instead of the estimate.
Related terms
Form 8027 · Form 4137 · Reported tips · Form W-2 · Cash tip
