What are allocated tips in box 8 of my W-2?
The short answer
Example math
Here’s how a restaurant gets to your box 8 number (all amounts illustrative):
| Step | Amount |
|---|---|
| Food and drink sales for the year (not counting carryout or sales with a service charge of 10% or more) | $1,000,000 |
| 8% of those sales | $80,000 |
| Tips all employees reported | $62,000 |
| Shortfall the employer must allocate | $18,000 |
| Your share, in box 8 | $1,500 |
- Your share is figured by a method in an employer-employee agreement, or by the IRS method based on sales or hours worked. Ask your employer which one it used.
- No daily tip record? Add the $1,500 to your wages on your return, and use Form 4137 for the Social Security and Medicare that weren’t withheld.
- Kept a daily record and reported all your tips? If your records show you got less than the allocated amount, you don’t have to add the $1,500. You only add tips you got but didn’t report to your employer.
Not tax advice. Sales and tip totals are made up for the example.
Plain English
Who has to allocate
Only a “large food or beverage establishment.” The IRS says that means all of these: it’s in the 50 states or DC, it serves food or drinks to eat or drink on the premises (not fast food), tipping is customary, and the employer normally had more than 10 employees on a typical business day the year before. These employers file Form 8027 each year, and that form is where allocated tips are figured.
Why you got them
You worked at one of these places, and the tips you reported came to less than your share of 8% of food and drink sales. If box 8 on your W-2 is blank, none of this applies to you.
What box 8 is not
Allocated tips are kept out of box 1 (wages, tips, other compensation), box 3, box 5 (Medicare wages and tips), and box 7 (Social Security tips). Those boxes carry the tips you actually reported. No income tax, Social Security, or Medicare is withheld on allocated tips, so none of that tax was paid through your paychecks.
Reporting them on your return
Publication 531 says to add to your box 1 wages only the tips you didn’t report to your employer. That should include your box 8 amount, unless you have adequate records showing you got less in tips for the year than the allocated amount. If you do add allocated tips, complete Form 4137 so you pay the Social Security and Medicare that weren’t withheld.
A lower rate than 8%
The IRS can approve a rate lower than 8%, but not lower than 2%. The employer or the employees can ask by filing a petition, and there’s a user fee. An employee petition needs the consent of a majority of the directly tipped employees, like servers and bartenders.
Common mistakes
- Assuming box 8 is already counted in box 1. It isn’t.
- Assuming tax was withheld on allocated tips. It wasn’t.
- Adding allocated tips on top of tips you already reported and can show with a daily record.
- Having no daily tip record, which leaves you with the employer’s number.
Official sources
Last verified:
Checked IRS Publication 531 (what allocated tips are, how they’re figured, when to report them, the 2% floor on a lower rate), the IRS tip recordkeeping page (who is a large food or beverage establishment, no withholding on allocated tips), and the 2026 W-2 instructions (box 8 kept out of boxes 1, 3, 5, and 7).
Still open: The IRS doesn’t define “adequate records” further on these pages. A daily tip record kept as Publication 531 describes is the record it points to.