What this line means
The Social Security and Medicare tax you owe on tip income that you received but did not report to your employer. If you received cash tips of $20 or more in any month and did not report them to your employer, you owe the employee share of FICA taxes on those tips. You calculate this on Form 4137 and enter the total here.
Does this apply to you?
- You received cash tips that you did not report to your employer
- You work in a job where cash tips are common — restaurant server, bartender, hairstylist, valet, delivery driver
- Your total tips for any month were $20 or more and you did not report the full amount to your employer
- You received tips on a Form 4137 from your employer indicating unreported tip income was allocated to you
Easy to overlook
Allocated tips on your W-2 Box 8 signal unreported income If your employer’s records show that you received fewer tips than expected based on total restaurant sales, the employer allocates the difference and reports it in W-2 Box 8. 1 Allocated tips are not included in your W-2 Box 1 wages, but they are taxable income. You must report them on your return and pay Social Security and Medicare tax on the unreported portion using Form 4137. IRS Form 4137 Instructions — Social Security and Medicare Tax on Unreported Tip Income
Unreported tips also affect your Social Security earnings record Tips that you do not report to your employer are not credited to your Social Security earnings record. 2 Over time, this reduces your future Social Security retirement benefits. Reporting tips now increases your tax bill slightly but also increases the earnings base used to calculate your retirement, disability, and survivor benefits. General filing pattern — cash tips unreported by service workers
Watch out for this
Ignoring Form 4137 because you believe cash tips are untaxable. All tips are taxable income regardless of whether they are cash, credit card, or non-cash. The IRS uses industry-specific tip allocation formulas and can compare your reported tips to average tip rates for your occupation and employer. Consistently underreporting tips triggers audits and back-tax assessments.
Footnotes
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IRS Form 4137 Instructions, Allocated Tips. https://www.irs.gov/instructions/i4137 ↩
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IRS Publication 531, Reporting Tip Income. https://www.irs.gov/pub/irs-pdf/p531.pdf ↩