A Comprehensive Guide to Form 4137

Death and taxes. It’s a little dramatic, don’t you think? Yet sometimes, doing taxes and filling out forms seems a little like dying. Unfortunately, it has to be done.

Workers who receive tips through their job must use Form 4137 as a means of reporting their earnings. We realize how confusing tax forms can be so here is a comprehensive guide to Form 4137. We’ll cover reporting tips, tip taxation, and everything needed to understand this form.

What is Form 4137?

This particular form has the official name of Social Security and Medicare Tax on Unreported Tip Income.

According to The Balance:

Employees who receive tip income are supposed to report tips of over $20 each month to their employer for tax purposes. Your employer should then calculate tax withholding on these amounts, just as taxes would be withheld on regular earnings.

Whether you do this or not, the tips must still be reported to the Internal Revenue Service.

Just the Basics

Taxpayers who receive tips at their job typically receive an hourly wage. The employer withholds Medicare and Social Security taxes from wages. And in many cases, state and federal taxes. This depends on how the worker completed the Employee’s Withholding Allowance Certificate (W-4) when hired.

The withheld amount has a basis of two components. These are hourly wages and tip income. In some cases, the tips are substantial enough that the paycheck does not cover the tax portion. If this happens, a portion of the tips covers the difference.

Tip Taxation Tips

That may be a tongue twister but it’s no laughing matter. Especially if you face tax penalties for not reporting tips properly.

How tips should work is that anything over $20 in one month should be reported to the employer. This is so they calculate the correct withholding from your paycheck. This is important because the IRS may impose a tax penalty with an increase in the amount owed.

Even if the amount over $20 fails to be reported, it must be reported to the IRS on your tax return. If this happens, income tax on those earnings must be paid. And, Medicare and Social Security taxes must be calculated using Form 4137.

The W-2 you receive during tax season reflects the hourly wages plus tips. These may be the ones reported or ones allocated to you by your employer. The amount needing to be entered on Form 4137 is the difference between the income earned and box 1 of your W-2.

Allocated Tips

The aforementioned allocated tips are what the employer allots tto you. This is when you do not participate in the Attributed Tip Income Program from your employer. Or, you fail to report tip income that’s at least 8 percent of your food and drink sales. These allocated tips are on your W-2 form on Box 8. This amount must be reported in calculating Social Security and Medicare tax. This goes on the Form 4137 unless you have proof of an incorrect allocation.

Line by Line Instructions for Form 4137

Preparing Form 4137 is fairly straightforward.

  • Line 1. This is your workplace along with their employer ID numbers. List each one and the total tips. This includes tips reported and tips unreported.

  • Line 2. This is a total of all tips. It does not matter how the tips were gained. Cash, credit cards, reported tips, and unreported tips all count as part of the total.

  • Line 3. This is where the tips reported to the employer go. Find this total on line 7 of your W-2 form.

  • Line 4. This is line 3 subtracted from line 2.

  • Line 5. This is where all of the tips under $20 go. These were not required to be reported to the place you work.

  • Line 6. Subtract line 5 from line 4. In this section, these are tips that may apply to Medicare tax.

  • Line 7. Nothing needs to be done here.

  • Line 8. This is where all of your wages are calculated from your W-2 in boxes 3 and 7. In rare cases, there may be tier 1 railroad benefits to add. Put the total here and these are subject to Social Security tax.

  • Line 9. Subtract line 8 from line 7. If you have a zero amount, place a zero on lines 9 and 10.

  • Line 10. Compare the figures on Line 6 and Line 9. Take the smaller of the two figures and report it on Line 10.

  • Line 11. Here is where you multiply line 10 by 6.2 percent which is 0.062 simplified. This is the Social Security tax.

  • Line 12. In this line, you multiply line 6 by 0.0145. This is the 1.45 percent Medicare tax.

  • Line 13. Add lines 11 and 12 to get additional Medicare and Social Security tax. Take note that this amount goes on Form 1040 on line 59.

What Happens if Tips Go Unreported?

It is imperative to report tips properly. In some cases, reasonable cause allows you to avoid penalties. If not, the fees can be up to 50 percent of the Social Security tax and Medicare tax. This reflects the money due on the unreported tips. Due diligence is another factor in avoiding penalties. Yet, for any reprieve from penalties, evidence must be provided. This is a statement attached to your return.

Let Us Help

We realize that doing your own taxes is stressful and often intimidating. While this comprehensive article helps, we are here to fill in the blanks. See what we did there?

We realize everyone wants to keep as much income as possible and tax forms like this one may be a hassle. With careful planning throughout the year, this form won’t be an issue. However, when you need a professional tax service, we’ve got you covered.

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