You must also file Form 4137 if you have any amount shown on your W-2 statement, box 8, "Allocated Tips." Reporting and paying tax on allocated tips can be create a significant tax bill, so I will provide some strategies for dealing with allocated tips below.
The $20 Threshold
You must report tips to your employer if you receive more than $20 in tips per month. These tips must be reported to your employer by the 10th day of the following month. If you work for more than one employer, the $20 limit is calculated for each employer separately. So, for example, one month you earned $19 in tips from one job, and $15 in tips from another job, then you do not need to report your tips to either employer. Also, you do not need to report tips totaling under $20 per month per employer on Form 4137 if that's the only unreported tips you have.
Line by Line Instructions
Names of Employers: List the company, or companies, to whom you did not report tips.Line 1: Total up all the tips you received in 2005. This includes:
- tips you reported to your employer,
- tips received in cash,
- tips received by credit card,
- tips you did not report to your employer,
- tips less than $20 per month that you were not required to report to your employer, and
- any allocated tips from box 8 of your W-2.
Line 2: Write in the total tips reported to your employer. This is found in box 7 of your W2.
Line 3: Subtract Line 2 from Line 1. These are the additional tips you must include in your wages on Form 1040 Line 7. These are also the additional tips on which you need to calculate your Social Security and Medicare taxes.
Line 4: Total up all the cash tips that were less than $20 per month, and so you were not required to report them to your employer.
Line 5: Subtract Line 4 from Line 3. These are the tips subject to Medicare tax. Enter this figure both on Line 5, and again on Line 2 of Schedule U, which is found at the bottom of Form 4137.
Line 6: This line is already filled in with the Social Security wage limit of $90,000. You do not need to do anything here.
Line 7: Add up all your wages reported on your W-2 statements in boxes 3 and 7, and your tier 1 railroad retirement benefits. These are the wages subject to Social Security tax. Put the total figure on Line 7.
Line 8: Subtract Line 7 from Line 6. If the result is a negative number, that means the amount on Line 7 is over $90,000. If that is the case, put "-0-" (zero) on Line 8 and on Line 9.
Line 9: Compare the figures on Line 5 and Line 8. Take the smaller of the two figures, and report it on Line 9. These are the additional tips subject to Social Security tax. Put the same figure again on Line 1 of Schedule U.
Line 10: Multiply Line 9 by 0.062. This is the Social Security tax of 6.2%.
Line 11: Multiply Line 5 by 0.0145. This is the Medicare tax of 1.45%.
Line 12: Add Lines 10 and 11 together. This is your additional Social Security and Medicare tax. Also enter this figure on Form 1040, Line 59.
