Form 4137: Social Security and Medicare Tax on Unreported Tip Income

When it comes to reporting income and paying taxes, it's important to ensure that all sources of income are properly accounted for. This includes tips received by individuals working in certain industries such as restaurants, bars, hotels, and other service-oriented establishments. To address the taxation of unreported tip income, the Internal Revenue Service (IRS) requires the use of Form 4137, a document that calculates and reports the Social Security and Medicare tax owed on such unreported tips.

Unreported tip income refers to the gratuities received by service employees that have not been properly reported to their employer for tax purposes. Tips, whether given in cash or through other means, are considered taxable income, just like wages or salaries. The IRS requires individuals to report all tip income received during the year, including both cash and non-cash tips. Failure to report tip income accurately can lead to legal and financial consequences.

In this blog, we will delve into the details of Form 4137 and shed light on its significance for individuals with unreported tip income.

Purpose of Form 4137

When individuals receive tips, they are required by law to report them to their employer if the total tips received in a calendar month amount to $20 or more. The employer then includes those reported tips in the employee's wages and withholds the appropriate FICA taxes.

However, if an employee fails to report all their tips or if the employer does not withhold FICA taxes on the reported tips, the employee is still responsible for paying the required Social Security and Medicare taxes on the unreported tips. This is where Form 4137 comes into play.

Form 4137 allows individuals to calculate the additional FICA taxes owed on the unreported tips and report them separately from their regular wages. Using this form, individuals can accurately determine the amount of FICA taxes they owe on their unreported tips and ensure compliance with tax laws.

Benefits of Form 4137

By filing Form 4137, individuals can properly report and pay their Social Security and Medicare taxes on their unreported tip income. Here are some benefits of filing Form 4137:

**Compliance with tax laws: **Filing Form 4137 ensures that individuals are complying with tax laws and fulfilling their obligations as employees. Accurately reporting tip income helps maintain transparency and integrity within the tax system.

Avoidance of penalties: Failing to report tip income can lead to penalties and potential legal consequences. By voluntarily filing Form 4137, individuals can avoid penalties associated with underreporting or failing to report tip income.

Accurate Social Security and Medicare benefits: The Social Security and Medicare taxes paid through Form 4137 contribute to an individual's eligibility for benefits in these programs. Accurately reporting tip income ensures that individuals receive the appropriate credits and benefits when they become eligible.

Protection of future retirement benefits: The Social Security taxes paid through Form 4137 contribute to an individual's Social Security benefits. Accurate reporting of tip income ensures that individuals have an accurate record of earnings for calculating future retirement benefits.

**Improved financial records: **Filing Form 4137 requires individuals to keep track of their tip income accurately. This can lead to better financial record-keeping and a clearer understanding of their overall income and tax obligations.

**Reduced audit risk: **By accurately reporting tip income on Form 4137, individuals can reduce their chances of being audited by tax authorities. Compliance with tax laws decreases the likelihood of triggering an audit and the associated stress and potential penalties.

Peace of mind: Filing Form 4137 and properly reporting tip income provides individuals with peace of mind, knowing that they are fulfilling their tax responsibilities and minimizing the risk of future issues with tax authorities.

Who Is Eligible To File Form 4137?

Generally, employees who receive tips as part of their job are eligible to file Form 4137 if they meet the following criteria:

1. Employed in a tipped occupation: The individual must work in an occupation where receiving tips is customary. Examples include waitstaff, bartenders, bellhops, casino dealers, and taxi drivers.

2. Cash tips of $20 or more per month: The individual must receive cash tips amounting to $20 or more per month from their job. This threshold applies separately to each job the individual holds in a tipped occupation.

3. Tips not reported to the employer: The tips received by the individual should not have been reported to their employer or included in their regular wages. If tips are already reported on the individual's Form W-2, they do not need to file Form 4137 separately.

How To Complete Form 4137: A Step-by-Step Guide

Here is a step-by-step guide to help you complete the form:

Step 1: Obtain a copy of Form 4137

You can download Form 4137 from the official website of the Internal Revenue Service (IRS). Visit the IRS website and search for "Form 4137" to find the most up-to-date version of the form.

Step 2: Gather the necessary information

Before you begin filling out the form, gather the following information:

1. Your personal information: Name, Social Security number, and address
2. Employment information: The name and address of your employer(s) who paid you tips
3. Tip income information: The total amount of unreported tips you received during the tax year

Step 3: Complete Part I - information about tips

In Part I of Form 4137, provide the required information about your tips. This includes your employer's name and address, your occupation, the total amount of tips you received, and any allocated tips.

(image: 4137_i.png)

Step 4: Calculate the social security and Medicare tax

In Part II, you will calculate the social security and Medicare tax owed on your unreported tips. Follow the instructions on the form to determine the tax amount based on the tip income you received.

(image: 4137_ii.png)

Step 5: Complete Part III - Computation of Social Security and Medicare Tax

In Part III, you will need to complete the computation of the social security and Medicare tax. This involves entering the calculated tax from Part II, multiplying it by the appropriate tax rate, and making any adjustments if necessary.

(image: 4137_iii.png)

Step 6: Complete Part IV - Allocation of Tips

If you have received allocated tips from your employer, you will need to complete Part IV. This section is used to allocate the tips among the employees who received them.

Step 7: Sign and date the form

Review the completed form for accuracy. Once you are satisfied that the information provided is correct, sign and date the form in the designated area.

Step 8: Submit the form

Make a copy of the completed Form 4137 for your records, and then submit the original to the IRS. The mailing address for Form 4137 can be found in the instructions accompanying the form or on the IRS website.

Special Considerations When Filing Form 4137

Here are some special considerations to keep in mind when filing Form 4137:

1. Tip income reporting: You must report all tips received during the year, including both cash and non-cash tips. Tips can include amounts directly received from customers, as well as tips allocated to you by your employer through a tip-sharing arrangement.

2. Earnings threshold: You need to file Form 4137 only if your total tip income for the year is $20 or more. If your total tip income is less than $20, you don't need to report or pay taxes on it.

3. Employer allocation: If your employer allocates tips to you, they should provide you with a Form W-2 that includes the allocated tip amount. You need to report this allocated amount on Form 4137.

4. Reporting on Form 1040: The total tip income (including both cash and allocated tips) reported on Form 4137 should also be reported on line 7 of your Form 1040 (U.S. Individual Income Tax Return).

5. Calculating Social Security and Medicare taxes: Form 4137 helps you calculate the Social Security and Medicare taxes owed on your tip income. The tax rate for Social Security is 12.4% on the first $142,800 of earnings in 2021 (subject to change), and the tax rate for Medicare is 2.9% on all earnings. The combined Social Security and Medicare tax rate is 15.3%.

6. Payment of taxes: The Social Security and Medicare taxes owed on your tip income should be paid along with your regular income tax liability when you file your annual tax return. If you expect to owe a significant amount of taxes, you may need to make estimated tax payments throughout the year to avoid underpayment penalties.

7. Self-employed individuals: If you are self-employed and receive tip income, you don't need to file Form 4137. Instead, you should report your tip income and calculate the Social Security and Medicare taxes on Schedule C or Schedule C-EZ of your Form 1040.

Common Mistakes To Avoid While Filing Form 4137

When filing this form, it's important to avoid common mistakes to ensure accurate reporting. Here are some common mistakes to avoid while filing Form 4137:

**Failing to report all tip income: **It's crucial to report all tip income received during the tax year accurately. Failure to report all tips could result in underreporting and potential penalties.

Not keeping accurate records: Keeping detailed records of all tip income received is essential. Make sure to maintain records that include dates, amounts, and sources of tips. Failing to maintain accurate records may lead to discrepancies and difficulties while filing Form 4137.

Incorrectly calculating Social Security and Medicare taxes: Form 4137 calculates the additional Social Security and Medicare taxes owed on unreported tip income. Ensure that you are using the correct tax rates and calculations based on the tax year in question. Refer to the instructions provided with the form or consult a tax professional if needed.

Missing the filing deadline: Filing deadlines are crucial to avoid penalties and interest charges. Ensure that you file Form 4137 by the appropriate deadline, which is usually the same as the individual income tax return filing deadline (April 15 for most taxpayers). However, it's always a good idea to double-check the current year's deadlines to ensure compliance.

**Not including the correct form with your tax return: **Form 4137 should be attached to your individual income tax return (Form 1040 or 1040-SR) when filing. Double-check that you include the correct form with your tax return to avoid processing delays or potential errors.

**Neglecting to sign and date the form: **It may seem obvious, but make sure to sign and date your Form 4137 before submitting it. Unsigned or undated forms may not be considered valid, and your filing could be rejected.

Failing to report other income correctly: If you have additional income besides unreported tip income, ensure that you report it correctly on your individual income tax return. Properly report all income from various sources to avoid discrepancies and potential audits.

Conclusion

Reporting all sources of income, including tips, is essential for individuals to meet their tax obligations. Form 4137 serves as a means to calculate and report the Social Security and Medicare tax owed on unreported tip income.

By complying with the requirements outlined in Form 4137, individuals can ensure that they fulfill their tax responsibilities while avoiding potential penalties and legal consequences.

Remember, when in doubt, it is always advisable to consult a tax professional who can provide personalized guidance based on your specific circumstances.

FAQs

Q: What is Form 4137?

A: Form 4137, also known as the Social Security and Medicare Tax on Unreported Tip Income, is a tax form used by employees who receive tips in cash and fail to report them to their employer. This form is used to calculate and report the Social Security and Medicare taxes on unreported tip income.

Q: Who needs to file Form 4137?

A: Employees who receive tips in cash and do not report them to their employer need to file Form 4137. This form is used to report and pay the Social Security and Medicare taxes on the unreported tip income.

Q: When should I file Form 4137?

A: Form 4137 should be filed annually by April 15 of the following year. For example, if you received unreported tip income in 2022, you should file Form 4137 by April 15, 2023.

Q: How do I calculate the Social Security and Medicare taxes on unreported tip income?

A: To calculate the Social Security and Medicare taxes on unreported tip income, you need to multiply the total unreported tip income by the applicable tax rates. As of 2021, the Social Security tax rate is 6.2% and the Medicare tax rate is 1.45%. Multiply your unreported tip income by these rates to determine the tax amount.

Q: Can I e-file Form 4137?

A: Yes, you can e-file Form 4137. Many tax preparation software programs support e-filing of this form. However, it's always a good idea to check with the IRS or consult a tax professional for the most up-to-date information on e-filing options.

Q: What happens if I don't file Form 4137?

A: If you fail to file Form 4137 and report the Social Security and Medicare taxes on your unreported tip income, you may be subject to penalties and interest charges imposed by the IRS. It's important to fulfill your tax obligations and report all income accurately to avoid any potential consequences.

Q: Can I amend Form 4137 if I made a mistake?

A: Yes, if you made a mistake on your original Form 4137, you can amend it by filing Form 1040X, Amended U.S. Individual Income Tax Return. You should use Form 1040X to correct any errors, omissions, or changes to your previously filed Form 4137.

Q: Where can I get Form 4137?

A: You can obtain Form 4137 from the official website of the Internal Revenue Service (IRS). It is available for download in PDF format. Additionally, many tax preparation software programs also provide the option to generate and fill out Form 4137 electronically.

Q: Are there any special rules or exceptions related to Form 4137?

A: Yes, there are certain rules and exceptions related to Form 4137. For example, if you participate in a tip reporting program established by your employer, special rules may apply. Additionally, there are specific provisions for certain industries, such as food and beverage establishments, where tip income is common. It's advisable to review the instructions provided with Form 4137 or consult a tax professional to understand any special rules or exceptions that may apply to your situation.

Q: Can I deduct expenses related to earning tip income on Form 4137?

A: No, Form 4137 is specifically used to report and pay Social Security and Medicare taxes on unreported tip income. It does not provide a mechanism for deducting expenses related to earning tip income. However, you may be able to claim deductions for eligible work-related expenses on your individual income tax return (Form 1040). It's recommended to consult a tax professional.