Because tips are income, they need to be reported on your tax return. Normally, you would report your tips to your employer, who then includes them on your W-2.
If you need to enter additional, unreported tips:
- Enter your W-2 in TurboTax, which is found on the Federal Taxes tab > Wages & Income subtab > Wages and Income topic. When finished, click Continue.
- On the next screen, select the third checkbox I received tips that I didn't report. Click Continue.
- On the Enter Any Tips You Didn't Report screen, fill in the appropriate fields that pertain to your situation.
What if I reported tips to my employer, but my employer didn't include them on my W-2?
Ask your employer for a corrected W-2 (Form W-2C) that includes the tips you reported to them.
If your employer refuses your request, they may be trying to avoid paying payroll taxes on the omitted tips. Unfortunately, this shifts their payroll tax responsibility to you.
Politely inform your employer that you will report the missing tips on your return to avoid problems with the IRS. You'll also be sending an explanatory letter to the IRS so you don't get stuck paying your employer's payroll taxes. Hopefully your employer will quickly figure out that it's in their best interest to issue a corrected W-2.
If your employer won't budge:
- Enter the unreported tips as explained above. TurboTax will automatically create Form 4137, Tax on Unreported Tip Income.
- Finish your return as usual, but do not e-file it. It must be paper-filed.
- Create an explanatory letter for the IRS. Your letter should mention that:
- You reported the correct tips to your employer;
- Your employer didn't include the full amount of tips on your W-2;
- Your employer refused to issue a corrected W-2;
- You kept records of your tips.
- Include the letter with your return when you mail it to the IRS. (Be sure to keep a copy of the letter for your records.)
The IRS will then contact your employer to collect payroll taxes and possibly a penalty or two for failure to report employee tips.