Fact Sheet: Unreported Tip Income and Allocated Tips
(2000 tax returns, only)
Generally all tip income is subject to income tax, Social Security Tax and Medicare Tax. An employee who receive tip income must report to his or her employer the total tips received if such tips exceed $20 in any calendar month. The report must be made to the employer by the tenth day of the month following the month for which the tip income is reported. The employer should record the amount reported in the employer’s records and on the employee’s W-2 at the end of the calendar year. Such tips are included in box “1” (total “wages, tips, and other compensation”), and in box 7 (“Social Security Tips”). Some employers must “allocate” tips whether they are reported or not and such allocated tips are reported to the employee and IRS in box 8 of the W-2.
Any employee who receives tips of $20 or more in a calendar month and who has not reported these tips to the employer by the 10th day of the following calendar month must file a Form 1040 and attach a Form 4137. Employees who receive allocated tips (box 8 of the W-2) must file a Form 1040 and attach a Form 4137 as well. Social Security Tax and Medicare Tax must be computed and paid on such tips. If the employee has received less than $20 in tips in a calendar month, such tips are not subject to Social Security or Medicare Tax.
Completing Form 4137:
Line 1: All tips received must be reported here, including cash, and charge tips, unreported tips, and tips reported in W-2 boxes 7, and 8 (allocated tips). Include tips that were not reported because the amount in calendar month was less than $20.00.
Line 2: Indicate on line 2 only tips reported from W-2 box 7 (“Social Security Tips”).
Line 3: Subtract line 2 from line 1. The result is the amount of tip income the taxpayer received but which was not reported to the taxpayer’s employer, but is nevertheless subject to tax. This amount must be included in the figure reported on Form 1040, line 7 (total salaries, wages, tips, etc.).
Line 4: State the total amount of tips that were not reported to the employer because the amount in a calendar month was less than $20.00. These tips are not subject to social security or Medicare tax.
Line 5: Subtract line 4 from line 3 to determine the amount of tips subject to social security and Medicare tax.
Line 6: The maximum amount of income subject to social security tax and Medicare tax for 2000 is $76,200.00. To the extent income exceeds this sum, it will not be subject to social security or Medicare tax.
Line 7: Indicate the total social security wages and tips received by the employee from all employers (social security wages (box 3), and social security taxes (box 7).
Line 8: Subtract line 7 from line 6, and indicate the difference. If line 7 is the same or more than line 6, report $0.00. No social security tax is owed.
Line 9: Enter the smaller figure from line 5 or 8 (social security tax is owed on this amount).
Line 10: Multiply the amount from line 9 by 6.2% (.062) (social security tax for employees). (Social security tax on tip income that should have been reported to the employer but was not, plus the social security tax on any allocated tips).
Line 11: Multiply the amount on line 5 by 1.45% (.145) to determine the Medicare tax on tip income that should have been reported to the employer but was not plus the Medicare tax on any allocated tips.
Line 12: Add lines 10 (social security tax owed), and 11 (Medicare tax owed), and enter the amount here and on Form 1040, line 53 as additional tax owed by the employee taxpayer.
Complete the bottom of Form 4137 (“Schedule ‘U.’”) to properly credit the taxpayer’s social security record.