Form 4137 - Social Security & Medicare Tax on Unreported Tips

Form 4137 - Social Security & Medicare Tax on Unreported Tips

Taxpayers who work in an industry in which a portion of their income is earned from customer tips along with their hourly wages need to pay Social Security and Medicare taxes on those earnings.

There are two requirements for tipped employees:

  1. Keep a daily tip record. The employee can use IRS Form 4070A, Employee's Daily Record of Tips , or they may elect to use their own documentation method. The employee should record the following tips:
  • Tips paid in cash and currency
  • Tips from credit card charges
  • Noncash tips such as tickets, passes, etc.
  • Tips the employee paid to other employees and their names, if there is a tip pooling or sharing arrangement.
  • Report tips to the employer. The employee is required to report cash, check, credit card, and debit card tips monthly if tips for the month are $20 or more. The $20 threshold applies separately to each employer. There are two taxes on tips:
    • Income Tax - Tips reported to an employer are included in Box 1 of Form W-2. All tips are taxable, including noncash tips and tips that total less than $20 a month.
    • Social Security and Medicare Tax - If an employee's wages are not enough to withhold tax, tax uncollected at year-end is reported in Box 12 of Form W-2 using code A or B.

    If tipped income is reported to the employer during the year, it will be included in Boxes 1, 5, 7, and 8 of Form W-2. However, if the taxpayer received more than $20 in unreported tips in a month, those tips will need to be entered on Form 4137 to calculate the additional Social Security and Medicare tax on the tips.

    In Software, unreported tips are entered in the tax return in two places, based on whether they were $20 or more per month or less than $20 per month:

    1. With the W-2. If the unreported tips for a given month totaled $20 or more, the sum of all these tips is entered with the employer's W-2 in the Unreported Tips box.

    2. On Form 4137. If the unreported tips for a given month totaled less than $20, the sum of all these tips is entered in the Form 4137 menu. From the Federal Section of the tax return (Form 1040) select:

    • Other Taxes
    • Tax on Unreported Tip Income - If filing MFJ, indicate who the form belongs to.
    • Enter two amounts as needed:
      • The sum of all unreported tips that totaled less than $20 per month.
      • Tips received as a Federal, State, or Local Government Employee. The amount entered here is deducted from Form 4137 Line 10 but included in the calculation on Line 12.

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