Calculating Allocated Tips and Additional Taxes on Form 4137
Help With Preparing Form 4137 So You Don't Pay Too Much
Employees who receive tip income are required to report that money to their employers for tax purposes if the tips are more than $20 a month. Your employer should then calculate tax withholding on these amounts, just as taxes would be withheld on your regular earnings. You're still required to report the income to the IRS even if you don't report it to your employer, but you would do it on Form 4137.
The Definition of "Allocated Tips"
Allocated tips are 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:
- You work in a food and/or beverage establishment.
- It's customary that you receive tips from your customers, and
- You reported tips that amounted to less than 8% of your share of the establishment's food and drink sales.
These tips will appear in Box 8 of your Form W-2. Your employer must assume that you made at least 8% in tips and report this 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, "Social Security Tips."
Reporting to Your Employer
You should report your tips in excess of $20 to your employer by the 10th day of the following month.
This $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.
You don't have to report tips totaling less than $20 per month per employer on Form 4137.
Filing Form 4137
The IRS likes to be paid when you get paid, or not long thereafter. It imposes a "pay as you go" timetable even for self-employed individuals—they must remit quarterly estimated taxes. You could potentially end up having to pay a penalty if you pay late because these taxes weren't withheld by your employer.
You must file Form 4137 if any amount appears in Box 8 of your W-2 statement for "Allocated Tips." Unfortunately, reporting and paying tax on allocated tips can create a significant tax bill.
Line-by-Line Instructions for Form 4137
Here's how to go about filling out Form 4137:
Line 1: List the company or companies to whom you didn't report tips in the spaces provided in this section, along with their employer ID numbers. You must also enter the total tips you received from working for each company, including both reported and unreported.
Line 2: Total up all the tips you received in 2019. This includes:
- Tips you reported to your employer
- Tips received in cash
- Tips received by credit card
- Tips you did not report to your employer
- Tips less than $20 per month that you were not required to report to your employer
- Any allocated tips from Box 8 of your W-2
Line 3: Write in the total amount of tips reported to your employer. You can find this number in Box 7 of your W-2.
Line 4: Subtract Line 3 from Line 2. These are the additional tips you must include in your wages on Line 1 of the 2018 or 2019 Form 1040, or Line 7 of Forms 1040 from tax year 2017 or earlier. These are also the additional tips on which you must calculate your Social Security and Medicare taxes.
Line 5: Total up all the cash tips that were less than $20 per month so you were not required to report them to your employer.
Line 6: Subtract Line 5 from Line 4. These are the tips that are subject to the Medicare tax. Enter this figure on Line 6.
Line 7: This line is already filled in with the Social Security wage base of $137,700 as of 2019. You don't have to pay Social Security tax on earnings over this amount, so you don't have to do anything here. The wage base increases annually to keep pace with inflation.
Line 8: Add up all your wages reported on your W-2 statements in Boxes 3 and 7, as well as your tier 1 railroad retirement benefits if you had any. These are the wages subject to Social Security tax. Put the total figure on Line 8.
Line 9: Subtract Line 8 from Line 7. The result will be a negative number if the amount on Line 8 is over the wage base of $137,700. Put "-0-" (zero) on Line 9 and on Line 10 if this is the case.
Line 10: Compare the figures on Line 6 and Line 9. Take the smaller of the two figures and report it on Line 10. These are the additional tips subject to Social Security tax.
Line 11: Multiply Line 10 by 0.062. This is the Social Security tax of 6.2%.
Line 12: Multiply Line 6 by 0.0145. This is the Medicare tax of 1.45%.
Line 13: Add Lines 11 and 12 together. This is your additional Social Security and Medicare tax. You must also enter this figure on Line 6 of Schedule 2 of your 2019 Form 1040 tax return. The total from this Schedule transfers to Line 15 on Form 1040.
Strategies for Allocated Tips
Having allocated tips reported on your W-2 in Box 8 is generally not in your best interest. Here's how to protect yourself.
Take a look at your record of daily tips. Get in the habit of keeping such a record if you don't have one. In fact, the IRS more or less requires that you do so. You'll need evidence of what you actually received if you're ever audited on your tip income.
Your system doesn't have to be fancy. Just note your daily tips on a calendar, day planner, or in a little notebook.
Add up the total amount of tips you received for the year. Did you report this amount to your employer? Look on your W-2. Does Box 7 (Social Security tips) and Box 8 (allocated tips) add up to the same amount in your daily record? Are your allocated tips (Box 8) more than, the same as, or less the total tips you recorded in your daily log?
If Your Allocated Tips Are More Than Your Records
You can use your daily log instead of the amount reported as allocated tips if your allocated tips are more than what's recorded in your daily log, but be prepared for a lot of mail from the IRS and a tip audit.
Keep your daily record of tips with your tax return so you're ready when the IRS auditor asks to see your records.
If Your Records Are More Than Box 8
Use the amounts from your daily records to fill out Form 4137 if there are any additional unreported tips.
If You Reported Your Tips
If your allocated tips are the same as what's recorded in your daily log and you did report them to your employer, your employer probably reported this amount in the wrong place. Ask your employer if this amount should have been reported in Box 7 for Social Security tips instead of Box 8.
You can go ahead and fill out Form 4137 using the figure in Box 8 if your employer won't correct your W-2.
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.
If You Have No Records
Ask your employer how he calculated your allocated tips amount 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 this information with you.
In the end, the IRS requires that you accept and report the amount cited in Box 8 if you have no records to substantiate that this amount is incorrect.
What to Expect From the IRS
The IRS loves to conduct tip audits, so be prepared to explain how you calculated your tip income if you have allocated tips and elect to not report the full amount on Form 4137.