The practice of tipping-out is one of the reasons you should keep a detailed daily log of your tips. If you document that you tip out, and you reported all your tips to your employer, then you do not include in your income the allocated tips in box 8 of Form W-2. Tipping-out, by itself, should not cause an allocated tip situation. First, when you report the cash tips you receive, you should report the total tips, then the amount tipped out. 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 can also petition for a lower rate.
The employee should keep a tip record of his or her daily tips. A daily tip record can relieve the employee from having to include allocated tips in his or her income by documenting that the amount of tips the employee reported were the actual amount received. Cash tips are tips received directly in cash or by check, and charged tips. You have a liability to withhold and pay social security and Medicare tax on your employees' reported tips, to the extent that wages or other employee funds are available. The employee should keep a tip record of his or her daily tips.