Any month you earn $20 or more of 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 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.