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Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries.
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Form 4137 reports an employee's tip income to the IRS if that income hasn't already been reported to their employer. Employees who receive tip income are normally required to report that money to their employers for tax purposes if the tips are more than $20 a month.
IRS Form 4137 calculates the Social Security and Medicare Tax you owe on tips that you receive, but that haven't been taxed.
The IRS likes to be paid when you get paid or not long after. It imposes a "pay as you go" timetable, even for self-employed individuals who must remit quarterly estimated taxes.
You must file Form 4137 with your tax return if any amount appears in your W-2's "Allocated Tips" box (Box 8). Unfortunately, in some cases, reporting and paying tax on allocated tips can create a significant tax bill. You could potentially end up having to pay a penalty if you pay late because taxes weren't withheld by your employer at the time you received the tips.
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Employees who have not reported tip income to their employers for purposes of tax withholding must use Form 4137 to reconcile the situation at tax time.
You don't have to report tips totaling less than $20 per month per employer. Otherwise, you should report your tips to your employer by the 10th day of the month following the month you earned them.
This less-than-$20 limit is calculated for each employer separately if you work for more than one employer. You wouldn't have to report your tips to either employer if you earned $19 from one job and $15 from another because neither amount exceeds $20.
Allocated tips must be assigned to you by your employer as income if you don't report sufficient tips over the course of the tax year. The IRS requires that your employer do this if three factors are met:
These tips will appear in Box 8 of your Form W-2. Your employer must assume that you made at least 8% of sales in tips and must report that income to the IRS. They should report the difference if you've reported less than 8%, or the entire 8% if you've reported no tip income at all.
Tips that you did report to your employer should appear in Box 7 of your Form W-2.
The IRS makes Form 4137 available on its website, complete with instructions. You can fill it out online and download it, or you can print it out. It's recommended that you download and save a digital copy, or at least keep a completed paper copy, so you have it on hand and can refer to it if the IRS should have any questions.
Form 4137 requires just one page and 13 lines of calculations; it's a relatively simple form.
Line 1 identifies the company or companies to which you didn't report tips, along with their employer ID numbers. You must also enter the total tips you received from working for each company, including those both reported and unreported.
Total up all the tips you received and write the total on Line 2. These include:
Write in the total amount of tips reported to your employer on Line 3. You can find the number in Box 7 of your W-2.
Subtract Line 3 from Line 2, and enter the result on Line 4. These are the additional tips you must include in your wages on Line 1 of Form 1040. These are the additional tips on which you must calculate your Social Security and Medicare taxes.
Total up all the cash tips that were less than $20 per month, which you weren't required to report to your employer. Enter this number on line 5.
Subtract Line 5 from Line 4, and enter the figure on Line 6. Those are the tips that are subject to Medicare tax.
Line 7 should already be filled in with the Social Security wage base of $147,000 for the 2022 tax year ($160,200 for tax year 2023). You don't have to pay Social Security tax on earnings over that amount per year.
The Social Security wage base increases annually to keep pace with inflation.
Add up all wages reported on your W-2 statements in Boxes 3 and 7, as well as any railroad retirement compensation, and enter the total on Line 8. These are the wages subject to Social Security tax.
Subtract Line 8 from Line 7, and enter the result on Line 9. The result will be a negative number if the amount on Line 8 is over the 2022 wage base of $147,000. Put "0" on lines 9 and 10 if this is the case.
Compare the figures on lines 6 and 9. Report the smaller of the two figures on Line 10. Those are the additional tips that are subject to Social Security tax.
On Line 11 you'll multiply Line 10 by the Social Security tax rate of 6.2%, and on Line 12 you'll multiply Line 6 by the Medicare tax of 1.45%.
Add lines 11 and 12 together, and enter the total on Line 13. This is the additional Social Security and Medicare tax you need to pay for the tips you didn't report. You must also enter the figure on Line 5 of Schedule 2 of your Form 1040 tax return.
Yes, you can file Form 4137 online. If you use tax prep software, the software will fill out the form for you, in most cases.
IRS mailing addresses for Form 1040 and its accompanying forms and schedules depend on your state of residence, as well as whether you're also enclosing payment. The IRS provides a list of addresses by state.
Generally speaking, the main requirements for Form 4137 are that you:
If you fail to report all your tips, you could face a penalty equal to 50% of the taxes you owe on your tips.
Having allocated tips reported on your W-2 in Box 8 is generally not in your best interest. Be prepared to explain to the IRS how you calculated your tip income if you have allocated tips and you've elected not to report the full amount on Form 4137.
The IRS requires you to keep a daily tip log. Start a log if you don't have one. If you do, take a look at your record of daily tips. It'll be helpful if the IRS has questions about your tip income.
Add up the total amount of tips you received for the year. Did you report that amount to your employer? Look at your W-2. Does Box 7 and Box 8 add up to the same amount in your daily record? Are your allocated tips in Box 8 more than, the same as, or less than the total tips you recorded in your daily log?
Your employer probably reported the amount in the wrong place if your allocated tips are the same as what's recorded in your daily log and you did report them to your employer. Ask your employer whether that amount should have been reported in Box 7 for Social Security tips instead of Box 8.
Something is probably wrong with your employer's recordkeeping system if your allocated tips are less than what's recorded in your daily log, and you reported your tips to your employer. You should report the allocated tips on Form 4137, plus any additional tips you show in your daily records. Ask your employer to correct your W-2.
Also, ask your employer how they calculated your allocated tips if you didn't keep a record of your tip income. Ask to see computer records, daily or weekly sales reports, or other information that would show your sales and your tips. You'll have to proceed very carefully and start keeping your own daily records to protect yourself if your employer refuses to share that information with you.
The IRS requires that you accept and report the amount stated in Box 8 if you have no records to substantiate that the amount is incorrect.
Yes. If you file to report tips, the IRS may impose fines. There may be consequences at the state level as well, depending on how your state treats tip income.
If you receive at least $20 in tips in any calendar month, you must report these to your employer in writing.
Your employer is required by law to withhold a certain amount of wages for payroll taxes, including Social Security and Medicare. These are based on a percentage of your income, which includes tips.
