Although many outside of the service industry are unaware, employees are required to report cash and charge tips to the IRS. Employers then account for the tip in their tax accounting and withholding. Employees are required to issue a written report during any month in which they receive $20 or more in tips. If an employee forgets or mistakenly does not report the income, Form 4137 is used to calculate Social Security and Medicare taxes on the previously unreported income.
As noted above, employees are required to report any tip income exceeding $20 in a month. If an employee works for two separate employers in a month, this rule applies separately to each, and not the total amount in tips that the employee receives from both jobs. Tips must be reported by the 10th of the following month, or the following business day if the 10th falls on a weekend or holiday. Your tips are subject to income taxes, as well as taxes for Social Security and Medicare and your employer deducts from your wages in order to fund these withholding.
The amount of tips that your employer reported to the IRS on your behalf will be included on your W-2. You want to make sure to inform your employer about the amount of tips you received. Failing to do so can result in a 50% penalty levied on your Social Security and Medicare taxes. If you fail to report tips in an honest mistake, you can file a statement explaining why you did not report them, and the penalty may not be applied.
The good news is that filling out Form 4137 is a breeze, provided you have all of the necessary information handy. Here’s what you’ll need:
- The name of each and every employer to whom you were required to but did not report tips
- Their employer identification number
- The total cash and charge tips you received that year from each of those employers, including those that went unreported
- The total amount of tips you reported to each employer
- The amount you didn’t report to your employer because your monthly tips were under $20
Form 4137 will then lead you through some basic mathematical operations using the amounts you made in tips, the amounts you already paid in taxes, and the amounts you should have paid. It will also compare your income against the maximum amount of wages subject to Social Security tax. At the end, you’ll have figured out how much you still owe in Social Security and Medicare taxes. A large difference between your withholding and the amounts owed could mean writing a fat check to the treasury.
Remember, the easiest way to make sure that your tip taxes are in line is to report your income to your employer as required. If you properly report your tip income, you’ll never have to worry about Form 4137. All of the relevant information will be included in your W-2, and all of your income will be accounted for in your withholding. That adds up to much less hassle.
Published or updated March 15, 2013.