Restaurant Business: Server declares their tips and is taxed on them. Every night they are required by the business to give the bartender 4% of alcohol sales in cash. No record of this. So the Server is being taxed on money given to the bartender. The bartender is collecting "cash" and not having to claim this as wages. Does this sound correct?

No, not unless the bartender is unusually honest and claims the cash as miscellaneous income on his tax return.

Declare your tips amount after subtracting the amount given to the bartender.

MukatA's answer is accurate.