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You are correct.
Straight form the IRS:
"Tips your employees receive from customers are generally subject to withholding. Employees are required to claim all tip income received. This includes tips you paid over to the employee for charge customers and tips the employee received directly from customers."
Employees must report tip income on Form 4070, Employee's Report of Tips to Employer (PDF), or on a similar statement. This report is due on the 10th day of the month after the month the tips are received. This statement must be signed by the employee and must show the following:
No report is required from an employee for months when tips are less than $20.
As an employer, you must ensure that the total tip income reported to you during any pay period is, at a minimum, equal to 8% of your total receipts for that period.
The person is not coming into the VFW and "voluntarily" serving. Someone "hired" them. That person is the employer and should be requesting the information.
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