When to Use Tax Form 4137: Tax on Unreported Tip Income
You may need to use IRS Form 4137 to calculate any additional tax you may owe on unreported tip income.
If you work in an industry where it’s customary to receive a portion of your income from customer tips, you need to pay Social Security and Medicare taxes on those earnings in addition to any hourly wages that you receive. However, you will need to report your tip income to your employer to have these taxes withheld from your paycheck. If you don’t, you may need to use IRS Form 4137 to calculate the additional tax you owe on the unreported tip income.
Tip taxation basics
Taxpayers who regularly receive tips at work generally also receive hourly wages from their employers. Your employer will withhold Social Security and Medicare taxes from your wages and perhaps federal and state taxes depending on how you completed your Form W-4, Employee's Withholding Certificate. The amount that gets withheld is based on your hourly wages and the amount of tip income that you report. However, if your tip income is substantial, paycheck may be insufficient to cover your taxes, and it may be necessary to give them a portion of your tips to pay the difference.
Reporting your tips
Any month you earn $20 or more in tips, you have an obligation to report them to your employer so they can calculate the appropriate amount of tax withholding; otherwise, the IRS can increase the amount you owe with a tax penalty.
However, failing to report all tip income to your employer doesn’t excuse you from reporting it on your tax return. In this case, not only must you pay income tax on these earnings, you also need to calculate the Social Security and Medicare taxes you owe using Form 4137.
When you receive a W-2 from your employer, it reports your hourly wages and the tips you actually report, or sometimes, tips that have been allocated to you—see below. At the end of the year, the difference between the amounts reported in box 1 of your W-2 and the income you actually earn when including your unreported tips is the amount you need to report on Form 4137.
If you fail to report tip income that’s at least 8 percent of your food and drink sales or choose not to participate in your employer’s Attributed Tip Income Program, your employer may allocate tips to you—which they will report in box 8 of your W-2. Unless you have sufficient evidence that your employer’s allocation is inaccurate, you must report this amount as unreported tip income when calculating your Medicare and Social Security tax on Form 4137.
Preparing Form 4137
Form 4137 is only one page in length and requires two straightforward calculations. First, you must report all unreported tips—even if under $20—which are subject to the Medicare tax. This amount is multiplied by the appropriate tax rate. The second calculation for your Social Security tax is similar, but it only applies to the first $160,200 of income for 2023 and $168,600 for 2024. Therefore, if the amount of your unreported tips plus all of your income that is subject to Social Security tax exceeds this amount, you don’t have to pay Social Security tax on the excess. Any additional tax liability from your tips is transferred to your total taxes amount as reported on your tax return.
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