What Is a 4137 Form and Why Might You Need to File It?
Learn what IRS Form 4137 is, when it applies, and how to report unreported tip income correctly to ensure accurate tax filings and avoid potential issues.
The IRS Form 4137 is used to report unreported tip income, ensuring the correct Social Security and Medicare taxes are paid. Employees who earn tips and fail to report them properly may face tax issues.
Understanding when this form applies and how to calculate the necessary taxes helps prevent penalties or unexpected tax bills.
Who Must Complete This Form
Employees who receive tips as part of their compensation must file Form 4137 if they did not report all of their tip income to their employer. The IRS requires employees who earn $20 or more in tips per month from a single job to report them to their employer, who withholds Social Security and Medicare taxes. If an employee fails to do this, they must report the unreported amount themselves using Form 4137.
This applies to workers in industries where tipping is common, such as restaurants, bars, hotels, and salons. For example, a server who receives cash tips directly from customers but does not report them must use Form 4137 to ensure the correct taxes are paid. Similarly, a hairstylist renting a chair in a salon who receives tips through mobile payment apps like Venmo or Cash App must report those earnings if they were not included in their employer’s payroll records.
Even if an employer operates a tip-sharing arrangement, employees are responsible for ensuring all tips they receive are reported. If an employer fails to include reported tips on an employee’s W-2, the employee must still use Form 4137 to correct the discrepancy. The IRS cross-references reported income with employer records, so failing to report tips accurately can lead to audits or penalties.
Calculating Tax on Tip Income
The tax owed on unreported tip income is determined by applying Social Security and Medicare tax rates to the total amount of tips not recorded through payroll. For 2024, the Social Security tax rate is 6.2% on earnings up to $168,600, while the Medicare tax rate is 1.45% with no income cap. An additional 0.9% Medicare surtax applies to earnings exceeding $200,000 for single filers or $250,000 for married couples filing jointly.
To calculate tax liability, an employee must total all unreported tips received throughout the year. If these tips push overall earnings above the Social Security wage base, only the portion below the limit is subject to the 6.2% tax. Medicare tax applies to all unreported tips, and if total wages surpass the high-income threshold, the extra 0.9% Medicare tax must also be factored in.
For example, if an employee earned $40,000 in regular wages and failed to report $5,000 in cash tips, Social Security tax would be 6.2% of $5,000 ($310), and Medicare tax would be 1.45% of $5,000 ($72.50). If the employee’s total wages exceeded $200,000, the additional Medicare surtax would apply to the portion above that threshold.
Timing Considerations for Filing
Form 4137 must be submitted with an individual’s annual tax return, meaning it is due by April 15, 2025, for the 2024 tax year. If an extension is granted, the new deadline is October 15, but any taxes owed must still be paid by the original due date to avoid interest charges.
Keeping accurate records is essential for those who earn tips consistently. The IRS recommends tracking tip income using Form 4070, an employer-provided system, or personal finance apps. This ensures that when tax season arrives, unreported tips are readily available, reducing the risk of miscalculations. Using tax software or consulting a professional early can help determine whether estimated payments should be made during the year to prevent a large balance due in April.
Correcting Mistakes and Avoiding Penalties
Errors in reporting tip income can lead to additional taxes, interest, and penalties, but they can often be corrected before they escalate. If a mistake is discovered after filing, an amended tax return using Form 1040-X should be submitted as soon as possible. The IRS generally allows up to three years from the original filing date to make corrections, but delaying increases the likelihood of an audit.
Underreported tip income may also trigger an IRS notice, such as a CP2000, which indicates discrepancies between reported earnings and IRS data. Responding promptly with documentation, such as bank records or personal tip logs, can help resolve disputes before penalties are assessed. Failure to address these notices can result in accuracy-related penalties of up to 20% of the underpaid amount, along with daily accruing interest.