It can be very difficult to file taxes on income you earned from a service job. When you’re working a service job, you won’t know exactly how much you’ll earn in a given year until you receive your W-2 in January. That’s because service jobs often pay hourly, and hours can fluctuate week to week.

Another reason why it’s difficult to files taxes on service jobs is because you have to account for the tips you earn. Even when tips go unreported, you still have to pay social security and medicare taxes on them via IRS Form 4137.

What exactly is unreported income? And how do you use Form 4137? Here are some tips on how to navigate this particular tax form.

What Is Unreported Income?

A “service job” is technically any job where you perform services for customers or businesses. More specifically, a service job is any job in which it’s common you earn tips from customers: food and drink service, shoe-shining, cutting hair, etc.

Your employer must report all wages to the federal government. What can make service jobs complicated is that sometimes wages go unreported. You’re supposed to report tips to your employer so that your employer can include tips as part of your wages. Any tips that go unreported to your employer qualify as “unreported income.”

Why are there taxes on my tips?

Your tips count as part of your wages, and so they’re subject to social security and medicare taxes. Many people believe that this is unfair, but we’re not here to debate that point. The rationale is that tips can account for a sizeable portion of an employee’s wage. Some waiters and bartenders, for example, can make more money on tips than on their hourly wage in a given shift.

Here’s the nice thing: you only have to pay taxes when you earned more than $20 in tips in a single month. If you earned less than $20 in tips, it’s yours to pocket.

Don’t Hide the Cash in Your Pockets

Most tips are given in the form of cash. For that reason, it’s easy for employees to try and shield the fact that they received tips so they don’t have to pay taxes on them.

“Nobody knows I got tipped, so I won’t report the income.”

Be careful. If your bank account gets randomly selected for audit by the IRS, you could get into legal trouble if there’s a discrepancy between your reported income and your bank account statements. Remember, when you knowingly don’t report income that you’ve earned, you could be partaking in tax evasion. Most likely, though, you’re receive a tax penalty from the IRS.

Anyhow, many situations could occur in which you find yourself with unreported income. That’s where Form 4137 comes in.

Here’s What Form 4137 Does

Form 4137 serves two purposes:

  • It identifies your unreported income
  • It calculates the amount you owe in social security and medicare taxes on that income

How to File Tax Form 4137

Don’t sweat; this is a relatively easy tax form to file. Here are step-by-step Form 4137 instructions.

If you need assistance, or if you’re seeking advice on your tax filing, contact us today and receive a free tax consultation.

Line 1

You’ll give two kinds of information on Line 1: information about your employer, and also the amount of tips you received that you didn’t report.

You’ll need:

  • Name of Employer
  • Employer Identification Number

You can find your Employer Identification Number on your W-2.

Then you’ll need to gather the following financial data:

  • Total amount in tips you received working for said employer, including unreported income
  • The total amount of tips you reported to your employer

If you’re filing taxes on unreported income for multiple jobs, list the other employers on the rows below.

Line 2, Line 3, and Line 4

One Line 2, add up the total amount of tips you received from all your employers.

On Line 3, add up the total amount of tips you reported to your employers.

On Line 4, subtract the sum of Line 3 from the sum of Line 2: (Line 2 – Line 3 = Line 4).

Line 5

Make note of any tips you received that you didn’t report to your employer because they didn’t amount to $20 in a single month.

Line 6

Subtract Line 5 from Line 4: (Line 4 – Line 5 = Line 6).

This is the amount of unreported income that you owe medicare tax on.

Line 7 and Line 8

In Line 7, write “$128,400” in the box. This is the maximum amount that you can be taxed on in 2018, in regards to social security.

On line 8, add the amounts from Line 3 and Line 7 (and also add your railroad retirement compensation, if applicable).

Line 9

Subtract Line 8 from Line 7 (Line 7 – Line 8 = Line 9). If Line 8 is greater than Line 7, enter “0.”

Line 10

Enter whatever number is smaller: Line 6 or Line 9. This is the amount of tips subject to social security tax.


Line 11 and Line 12

Now it’s time to calculate exactly how much you owe in unreported income taxes.

On Line 11, multiply Line 10 by the social security tax rate, which is 0.062.

On Line 12, multiply Line 6 or Line 9 by the medicare tax rate, which is 0.0145.

You’ve Completed Form 4137

On Line 13, add Line 11 and Line 12. Now you’re done!

How Do I Pay Taxes on My Unreported Income?

You don’t need to pay these taxes separately from your other income taxes. You’ll report Line 13 when you’re filling out Form 1040. Your taxes on unreported income will be added into your other taxes.

Form 1040 will give you more information on how to make payments on owed taxes. If you’re seeking the easiest possible tax filing experience, consider filing your taxes on Form 1040EZ.