Allocated tips are tips your employer is required to pay to you if you worked in a large food or beverage establishments such as a restaurant, cocktail lounge or similar businesses where tips are customary. This is found in Box 8 of your W-2.
Employers use Form 8027 if there are more than 10 employees who exceed 80 hours. The employer will use business receipts, charged tips, and employee-reported tips. If employees reported tips that did not equal the set percentage of the business’ gross receipts, then employers must allocate tips to those whose reported tips fell below the set percentage.
Your employer will allocate or calculate your tips for you. The normal calculation is to first subtract the number of reported tips of all employees from 8% of the total food and drinks sales and then you get a part of this difference. The rough idea is that you deserve your share of 8% of the establishment’s total food and drinks sales.
Ask your employer for the exact calculation of your allocated tips. The rate might be lower than 8% if the employer has approval from the IRS. You must report your allocated tips unless your actual tips are more than the sum of the tips you reported to your employer and your allocated tips.
Employees are responsible for keeping the record of their cash and noncash tips. Cash tips are received directly from a customer. This also includes tips charged by credit card, debit card, gift card or any other electronic payment method. Non-cash tips are tickets, passes or other items of value. Splitting tips are when fellow employees divide tips to share a tip with other employees. Read more to learn about what is tip income.
If tips don’t exceed $20, then they do not have to report the amount to their employer. No particular form must be used unless specified by the employer.