Form 4137: Unreported Tips
Working a service job comes with an array of challenges. If you wait tables, deliver food, or belong to another profession that generally relies on tips, the work can be tough. Day-to-day, the job can be fast-paced, stressful, and demanding. On top of all of that, a brand new challenge arises when tax time rolls around each year. 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 file 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? To answer these questions and more, we’ve come up with a guide for how to navigate this particular tax form. Keep reading to learn all about Form 4137 or skip to any section using the links below.
What is IRS Form 4137?Before you fill out IRS Form 4137, it’s important to understand what it is and why you’re filling it out. When you work a service job where tip money is a portion of your income, you have to pay Social Security and Medicare taxes on that income. To pay these taxes, either your employer needs to withhold them from your paychecks, or you need to use IRS Form 4137 to report your tip income and pay the taxes yourself. In a nutshell, 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
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 sizable 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, there’s no need to fill out IRS Form 4137, and the money is yours to pocket.
Why Should I File Form 4137?If applicable to you, you should file Form 4137 for the same reason you file your income taxes every year—because if you don’t, you could potentially end up in legal trouble or be subject to monetary penalties. The IRS notes that if you fail to report your tips, you could face a penalty equal to 50% of the Social Security and Medicare taxes due on those tips. With that being said, don’t hide 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. Some people in the service industry may tell themselves, “Nobody knows I got tipped, so I won’t report the income.” But be careful. If your bank account gets randomly selected for audit by the IRS, you could get into legal trouble if they find 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’ll 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.
When to File Form 4137IRS Form 4137 should be submitted alongside your individual income tax return. This means that Form 4137 and Form 1040 should be sent to the IRS at the same time. The deadline to submit Form 4137 is the same as the deadline to submit your federal income tax return. The last day that you can file your 2020 tax return without facing any late penalties is April 15, 2021.
How to File Form 4137Don’t get too stressed out over Form 4137—this is a relatively easy tax form to file. If you wish to file the form yourself, here are step-by-step Form 4137 instructions. However, if you need assistance or would like advice on your tax filing, you can always contact Community Tax. Our tax experts would be happy to provide you with a free tax consultation. Below are the Form 4137 filing instructions, broken down by step:
Line 1You’ll give two kinds of information on line 1. This step requires you to provide details about your employer and also describe the amount of tips you received that you didn’t report. You’ll need:
- Name of employer
- Employer Identification Number (EIN). You can find your Employer Identification Number on your W-2.
- Total amount in tips you received working for said employer, including unreported income
- The total amount of tips you reported to your employer
Line 2, Line 3, and Line 4On line 2, add up the total amount of tips you received from all your employers. Assuming you’ve already completed line 1, you’ll just have to add up the numbers in line 1, column (c). On Line 3, add up the total amount of tips you reported to your employers. Once again, assuming you’ve completed line 1, this just means you’ll have to add up the numbers in line 1, column (d). On Line 4, subtract the sum of line 3 from the sum of line 2: (Line 2 – Line 3 = Line 4). You are required to report this amount in the total on Form 1040.
Line 5Make 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. As we stated above, you won’t be required to pay taxes on tips that totaled less than $20 in a calendar month.
Line 6Subtract line 5 from line 4: (Line 4 – Line 5 = Line 6). The result is the amount of unreported income that you owe Medicare tax on.
Line 7 and Line 8In line 7, write “$137,700” in the box. This is the maximum amount that you can be taxed on in 2020, with regard to Social Security. In other words, if you earned more than this amount this past tax year, any income exceeding the cap won’t be subject to the Social Security tax. For 2020, the Social Security tax rate that a worker must pay on their tips comes out to 6.2%. On line 8, add the amounts from line 3 and line 7—this is the total amount of your wages and tips that are subject to Social Security tax. Also, if applicable, add your railroad retirement (RRTA) compensation to line 8.
Line 9Subtract line 8 from line 7 (Line 7 – Line 8 = Line 9). If line 8 is greater than line 7, enter “0.”
Line 10Enter whatever number is smaller: line 6 or line 9. This is the total amount of unreported tips subject to Social Security tax.
Line 11 and Line 12Now 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 (6.2%). On line 12, multiply line 6 or line 9 by the Medicare tax rate, which is 0.0145 (1.45%).
You’ve Completed Form 4137On line 13, add line 11 and line 12. Once you’ve calculated this sum, you’re done with Form 4137! Remember that you don’t need to pay these taxes separately from your other income taxes. You’ll report the number you calculated for line 13 when you’re filling out Form 1040. Your taxes on unreported income will be added to the rest of your federal income 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.
Final ThoughtsWhen you work a service job, your employer is required to report all of your wages, including tips, to the federal government. However, sometimes things can get complicated and, as a result, you either fail to report all of your wages to your employer or your employer fails to report all of your wages to the federal government. In this case, any tips that aren’t reported to your employer are considered unreported income. Filing IRS Form 4137 is necessary for anyone in the service industry who earned unreported income this past tax year. While you may be nervous about losing your tip money to taxes or inconvenienced by filling out Form 4137, it’s a necessary step if you wish to stay in compliance with the law. If you don’t report your tips, you could face monetary penalties and legal complications in the long-term. We know that filing taxes can be a burden, especially if you work a demanding job in the service industry. That’s why our experts at Community Tax are here to help. Whether you need assistance with tax preparation or tax relief, we can make the process easier for you. So far, we’ve helped over 90,000 clients with their tax needs, and we’d be happy to help you as well. To learn more about our services and schedule a free tax consultation, call us at (844) 328-5857.