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. If this income is reported to the employer during the year, it will be included in Box 8 of Form W-2. However, if the income is unreported, it will need to be entered on Form 4137 to calculate the additional tax on the tips.
Two requirements of tipped employees:
- Keep a daily tip record. See Form 4070A, Employee’s Daily Record of Tips. The employee should record the following tips:
- Cash tips
- 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.
- Report tips to the employer. The employee is required to report cash, check, credit card, and debit card tips monthly if tips for the month are $20 or more. The $20 threshold applies separately to each employer. Two taxes on tips:
- 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 the taxpayer received $20 or more in tips in a month and did not report the tips to the employer, then the preparer will need to enter these unreported tips on Form 4137.
To enter unreported tips in Keystone Tax Solutions Pro, from the Main Menu of the Tax Return (Form 1040) select:
- Other Taxes Menu
- Social Security & Medicare Tax on Tips (4137)
- Select W-2 Employer Information, select the employer, and enter the amount of unreported tips
NOTE: This is a guide to entering unreported tips into the Keystone Tax Solutions Pro program. This is not intended as tax advice.
Additional Information:
Publication 1244, Employee’s Daily Record of Tips and Report to Employer