Taxpayers who work in an industry in which a portion of their income is earned from customer tips along with their hourly wages need to pay Social Security and Medicare taxes on those earnings.
There are two requirements for tipped employees:
- Keep a daily tip record. The employee can use IRS Form 4070A, Employee's Daily Record of Tips , or they may elect to use their own documentation method. The employee should record the following tips:
- Tips paid in cash and currency
- Tips from credit card charges
- Noncash tips such as tickets, passes, etc.
- Tips the employee paid to other employees and their names, if there is a tip pooling or sharing arrangement.
- Income Tax - Tips reported to an employer are included in Box 1 of Form W-2. All tips are taxable, including noncash tips and tips that total less than $20 a month.
- Social Security and Medicare Tax - If an employee's wages are not enough to withhold tax, tax uncollected at year-end is reported in Box 12 of Form W-2 using code A or B.
If tipped income is reported to the employer during the year, it will be included in Boxes 1, 5, 7, and 8 of Form W-2. However, if the taxpayer received more than $20 in unreported tips in a month, those tips will need to be entered on Form 4137 to calculate the additional Social Security and Medicare tax on the tips.
To enter unreported tips in the tax return in the desktop version of TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Other Taxes Menu
- Social Security & Medicare Tax on Tips (4137)
- W-2 Employer Information - Select the employer and enter the total of all unreported tips, without consideration for the $20 per month threshold.
- Tips Not Reported because they were < $20 a month - Enter here the total of unreported tips received in a month where the total for the month was under $20. These tips are included in the previous step but then are deducted before calculating the additional Social Security and Medicare tax.
- Tips Received as Federal, State or Local Government Employee - The amount entered here is deducted from Form 4137 Line 10 but included in the calculation on Line 12.
Note: This is a guide to entering unreported tips into the TaxSlayer Pro program. This is not intended as tax advice.
Publication 1244, Employee’s Daily Record of Tips and Report to Employer (includes Form 4070A)