How to: Box 7 on a W-2 on a Tax Return

Servers must keep accurate records of gratuities.

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The U.S. tax code obligates employers to track their staff’s wages and payroll deductions. At the start of tax season, they must also compile the same information on Form W-2, which they then mail to each employee and the Social Security Administration. As an employee, you refer to the W-2 to prepare your tax return. Inside box 7 of the form, for example, you find all the tips you received and reported to your employer during the tax year. Tips count as taxable income. Overlooking them may result in underpaying the IRS and incurring penalties.

Step 1

Keep a daily log of the tips you receive. The IRS also considers non-cash gratuities, such as event tickets, as tips. Record the value of those in the same tip log.

Step 2

Report to your employer each month the tips you receive. Report them by the 10th of the following month. Do not report non-cash tips such as tickets, since you do not pay Social Security and Medicare taxes on those. Your employer will add them up to include in box 7 of your W-2 at the end of the tax year. You will receive your W-2 by Jan. 31 of the following year.

Step 3

Add the amount in box 7 of Form W-2 to the non-cash tips you didn't report to your employer and add the total to the amount in box 3, “Social Security Wages.” When preparing your tax return, write the total on line 7 of IRS Form 1040 or 1040A, or on line 1 of Form 1040EZ.