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. Their employer should then calculate tax withholding on these amounts.
You're still required to report the income to the IRS even if you don't report it to your employer, or your employer doesn't withhold for some reason, and you would do so on Form 4137.
- IRS Form 4137 is used to report to the IRS any tip income that appears in box 8 of your Form W-2, “Allocated Tips.”
- Your employer must allocate tips to you if you work in a food or beverage establishment, if you regularly receive tips, and if you reported receiving tips to your employer that were less than 8% of your share of the establishment's food and drink shares.
- You must pay Medicare and Social Security taxes on this income, so it must be reported if your employer hasn’t already withheld taxes from your income to cover these tips.
- Form 4127 calculates the Medicare and Social Security taxes you would owe.
What Is IRS Form 4137?
IRS Form 4137 calculates the Social Security and Medicare Tax you owe on tips that you receive, but from which these taxes have not already been withheld.
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, who must remit quarterly estimated taxes.
You must file Form 4137 with your tax return if any amount appears in box 8, "Allocated Tips," of your W-2 statement. Unfortunately, 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.
Who Uses Form 4137?
Employees who have not reported tip income to their employers for purposes of withholding must use Form 4137 to reconcile the situation at tax time, but that is subject to several rules.
You don't have to report tips totaling less than $20 per month per employer on Form 4137. Otherwise, you should report your tips in excess of $20 to your employer by the 10th day of the month following the one in which you earned them.
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.
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:
- 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 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, "Social Security Tips."
Where to Get Form 4137
The IRS makes Form 4137 available on its website, complete with instructions. You can fill it out online and download it or print it out. It's recommended that you download and save an electronic file, 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.
How to Fill Out Form 4137
IRS Form 4137 might have some ominous implications, but it only comprises 13 numbered lines and five lettered lines, so filling it out is somewhat manageable.
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 in 2020 on line 2. These include:
- 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
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 the 2018, 2019, or 2020 Form 1040, or line 7 of Forms 1040 from tax years 2017 or earlier. 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 the Medicare tax.
Line 7 is already filled in with the Social Security wage base of $137,700 for the 2020 tax year, the return you'd file in 2021. You don't have to pay Social Security tax on earnings over that amount per year, so you don't have to do anything there. This wage base increases annually to keep pace with inflation. It increased to $142,800 for the 2021 tax year.
Add up all wages reported on your W-2 statements in boxes 3 and 7, as well as any tier 1 railroad retirement benefits. These are the wages subject to Social Security tax. Enter the total figure on line 8.
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 2019 wage base of $132,900. Put "-0-" (zero) on lines 9 and 10 if so.
Compare the figures on line 6 and line 9. Report the smaller of the two figures on line 10. Those are the additional tips that are subject to Social Security tax.
Multiply line 10 by 0.062, which is the Social Security tax rate of 6.2%.
Multiply line 6 by 0.0145, which is the Medicare tax of 1.45%.
Add lines 11 and 12 together, and enter the total on line 13. That is your additional Social Security and Medicare tax. You must also enter the figure on line 5 of Schedule 2 of your 2020 Form 1040 tax return. The total from this Schedule transfers to line 15 on Form 1040.
Can Form 4137 Be E-Filed?
Where to Mail Form 4137
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 applicable addresses on its website.
Requirements for Filing Form 4137
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 elect to not report the full amount on Form 4137.
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 a record 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 or a day planner or in a little notebook.
Add up the total amount of tips you received for the year. Did you report that 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 in box 8 more than, the same as, or less the total tips you recorded in your daily log?
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 and if an IRS auditor asks to see your records.
Use the amounts from your daily records to fill out Form 4137 if there are any additional unreported tips.
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.
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.
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.