Desktop: Form 4137 - Social Security & Medicare Tax on Unreported Tips

Earnings from customer tips and hourly wages are subject to Social Security and Medicare taxes. For tipped employees, there are two requirements: 

Keep a record of the daily tips. The employee may use a documentation method of their own or the IRS Form 4070A, Employee’s Daily Record of Tips. The following tips should be recorded by the employee: 

• Tips that are paid in cash and currency 
• Tips out of credit card charges 
• Tips that do not involve cash. For instance, tickets and passes amongst others
• Tips that the employee pays to their colleagues and their names. This happens when there exists a sharing arrangement. 

Report tips to the employer. Employees are required to report tips in the event that a month’s tips are $20 or in excess of $20. This amount applies differently to every employer. Two taxes can be applied on tips: 

• Income Tax - Box 1 of Form W-2 includes information of tips that have been reported to an employer. All tips are subject to tax, that includes non cash tips and those that are less than $20 in a month. 
• Social Security and Medicare Tax - Using code A or B, report tax that is not collected at the end of the year due to the employee’s wages not being able to withhold tax in Box 12 of Form W-2  

If the employee reports their tipped income during the year to their employer, that income will be included in Boxes 1, 5, 7 and 8 of Form W-2. A month’s tips that are more than $20 but are unreported are reported on Form 4137. This is so that the Social Security and Medicare tax on the said tips can be calculated.  

To enter unreported tips in the tax return: 

• Go to the Main Menu of the tax return (Form 1040) 
• From the menu, select Other Taxes Menu 
• Proceed to Social Security & Medicare Tax on Tips (4137) 
• W-2 Employer Information - Choose the employer and enter the sum of all unreported tips, without consideration for the monthly threshold of $20. 
• Tips Not Reported Because they were < $20 a month - Enter the sum of unreported tips received in a month in which the total was less than $20. These tips are made part of the prior step but are then deducted before computing the additional Social Security and Medicare tax. 
• Tips Received as Federal, State or Local Government Employee - The amount to be entered here is subtracted from Line 10 of Form 4137 but included in the calculation on Line 12. 

Additional Information:

Publication 1244, Employee’s Daily Record of Tips and Report to Employer (includes Form 4070A)

Publication 531, Reporting Tip Income