Taxpayers who work in an industry in which a portion of their income is earned from customer tips along with their hourly wages still need to pay Social Security and Medicare taxes on those earnings. It's possible to pay these taxes during the year when the income is reported to the employer and will be included in box 8 of the W-2 for Allocated Tips. However, if the income is unreported you may need to use Form 4137 to calculate the additional tax which will be included on the wages line of the tax return.
Requirements of tipped employees:
- Keep a daily tip record. Record the following:
- Cash tips
- Tips from credit card charges
- Noncash tips such as tickets, passes, etc.
- Tips paid out to other employees and their names
- Report tips to employer. Employee is required to report tips monthly if tips for the month are $20 or more. This threshold applies separately to each employer. Only cash, check, debit or credit card tips are reported to an employer. Do not report tips paid out to other employees.
- Report tips on tax return
- Income Tax - Tips reported to an employer are included in Form W-2 Box 1. All tips are taxable, including noncash tips and tips that total less than $20 a month. Add tips not reported to an employer to the total reported on Form 1040 Line 7.
- Social Security and Medicare Tax - If an employee's wages are not enough to withhold tax, tax uncollected at year-end is reported in Form W-2 Box 12, codes A and B. If an employee received $20 or more in cash and charge tips in a month and did not report tips to employer, complete Form 4137.
To enter unreported tips in TaxSlayer Pro, from the Main Menu of the Tax Return (Form 1040) select:
- Other Taxes Menu
- Social Security & Medicare Tax on Tips (4137)
NOTE: This is a guide on entering unreported tips into the TaxSlayer Pro program. This is not intended as tax advice.