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Frequently Asked Tax Questions

Interest, Dividends, Other Types of Income - Tips

  1. Of my allocated tips, I tip-out 15% to the busboy and 5% to the bar. Where do I deduct this on my tax return?

Rev. date: 08/04/2012

Of my allocated tips, I tip-out 15% to the busboy and 5% to the bar. Where do I deduct this on my tax return?

You cannot deduct tip-outs (the tips you split with other employees) on your tax return. Nor can you deduct them from your allocated tips. The law requires that you report your tips to your employer by the 10th of the month following the month you received your tips.  At the time you report your tips to your employer, you do not report any portion of the tips you receive that you passed on to other employees,  However you must have a record of the tips you shared with other employees.
Tipping-out, by itself, should not cause an allocated tip situation:
You must include the allocated tips shown in Box 8 of your Form W-2 as income on your income tax return unless you have adequate records to show that you received less tips in the year than the amount shown in Box 8.  Your employer allocated tips to you if the tips you reported to your employer were less than your share of 8% of food and drink gross receipts,
               o Cash tips received
               o Credit and debit card tips received
               o Tips paid out (tip-outs)
               o Net tips

The detail of the information provided should enable your employer to develop a reasonable, fair, and accurate method for determining whether tips need to be allocated, and, if so, how much.
Employers who operate large food and beverage establishments are only required to allocate tips if the total tips reported by all the employees who customarily receive tips are less than 8% of gross receipts.
When there is a tip-splitting arrangement, it is important that all tips, including those received through tip-splitting, be reported to the employer by each employee who receives $20 or more in a month.