What this line means
The difference between your total cash tips received (line 1) and the tips you reported to your employer (line 2). This is the amount of tip income on which your employer did not withhold Social Security and Medicare taxes. You owe those taxes directly, which is why you are filing Form 4137.
Does this apply to you?
- You received cash tips that you did not report to your employer during the year
- You earned tips that fell below the $20 monthly reporting threshold but still owe FICA taxes
- You received allocated tips from your employer (shown in W-2 Box 8) that you did not report
- You changed jobs during the year and did not report tips at one or more employers
Easy to overlook
Unreported tips also increase your income tax Form 4137 calculates only the Social Security and Medicare tax on unreported tips. The unreported amount on line 3 also needs to be included as income on Form 1040. If you did not already include these tips in your total income, you owe income tax on top of the FICA taxes calculated here. 1 IRS Publication 531 — Reporting Tip Income
The IRS uses tip compliance agreements to estimate expected tips For restaurants and bars, the IRS has Tip Rate Determination Agreements (TRDA) and Tip Reporting Alternative Commitment (TRAC) programs that establish expected tip rates for specific establishments. If your reported tips fall significantly below the expected rate for your type of work, the IRS flags the discrepancy. Zero unreported tips in a cash-heavy occupation draws scrutiny. 2 CP2000 pattern — unreported tip income from cash-heavy jobs
Watch out for this
Reporting zero on line 3 when you have allocated tips in W-2 Box 8. Allocated tips are the employer’s estimate of tips you received but did not report. If you received allocated tips, some portion of line 1 was not reported to your employer, which means line 3 is not zero. Ignoring allocated tips understates your unreported amount and triggers IRS matching.
Footnotes
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IRS Publication 531, Reporting Tip Income. https://www.irs.gov/pub/irs-pdf/p531.pdf ↩
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IRS Tip Rate Determination/Education Program. https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting ↩