All tips received by an employee are subject to federal income tax.
Allocated tips from Form W-2 that the employee reports on Form 4137. Tips reported later as a result of an IRS audit. Employer enters into an agreement with the IRS to report cash and charge tips to employees at a fixed rate. Employer agrees to encourage employees to properly report their tips, and provides periodic education about tip reporting requirements. In return, the IRS limits the circumstances under which it will assess back taxes for unreported tips against the employer.