This AIM Financial tax-form guide explains IRS Form 4137 — Social Security and Medicare Tax on Unreported Tip Income. This form is especially important for employees who receive cash or credit-card tips that were not fully reported to their employer. For eligible workers, accurately reporting tips can also affect eligibility for the federal qualified tips deduction available for tax years 2025 through 2028.

From AIM Financial — Tax Preparation Services in Grand Rapids, Kentwood, Wyoming, and West Michigan

If you work in a restaurant, bar, salon, hotel, or another tipped occupation, understanding how to report tips is an important part of filing your federal income tax return. Cash tips, credit-card tips, and tips received through tip-sharing arrangements may all affect your taxes. When tips have not been fully reported to an employer, IRS Form 4137, Social Security and Medicare Tax on Unreported Tip Income, may be required.

AIM Financial helps individuals understand tax forms, report income correctly, and identify applicable tax benefits. Here is a plain-English explanation of Form 4137 and when it may apply.

What Is IRS Form 4137?

Form 4137 is used to calculate Social Security and Medicare taxes owed on certain tips that an employee did not report to their employer. These taxes are commonly known as payroll taxes.

Employees generally must report their tips to their employers so the employer can account for the income and withhold the appropriate taxes. If an employee fails to report all required tips, Form 4137 helps calculate the employee’s share of Social Security and Medicare taxes on the unreported amount.

The form is filed with the individual’s federal income tax return. It does not replace the requirement to report taxable tip income on the return.

You can find the current form and instructions on the official IRS Form 4137 page.

Who May Need to File Form 4137?

Form 4137 may apply to employees who receive tips but do not report all required amounts to their employer.

Examples include:

• Restaurant servers who receive cash tips but report only their credit-card tips.
• Bartenders who fail to include all tips received during a shift.
• Employees who receive tips through a tip-sharing or tip-pooling arrangement.
• Workers whose Form W-2 reports allocated tips that exceed the tips they can substantiate with adequate records.

Generally, employees must report cash tips to their employer when they receive $20 or more in tips during a calendar month from that employer. Cash tips include tips received in cash, by check, and through electronic payments such as credit and debit cards.

Tips totaling less than $20 in a month generally do not have to be reported to the employer under this rule. However, those tips may still be taxable income and must be reported on the employee’s tax return.

Understanding Allocated Tips on Form W-2

One of the most confusing issues involves allocated tips shown in Box 8 of Form W-2.

Certain employers, including qualifying large food and beverage establishments, may allocate tips to employees when reported tips fall below the applicable required amount. Allocated tips are generally not included in Box 1 wages, and payroll taxes may not have been withheld on them.

The employee generally must report the allocated tips as income unless adequate records establish that the actual tips received were lower. Form 4137 helps calculate Social Security and Medicare taxes on the applicable unreported tips.

Keeping a daily record of tips received and tips shared with other employees can be extremely important. Without adequate records, an employee may need to report the full allocated amount.

The IRS provides additional guidance in Publication 531, Reporting Tip Income.

How Do You Complete Form 4137?

Form 4137 may look complicated, but understanding the main steps helps.

Step 1: Gather your records. Collect your Form W-2, daily tip records, employer tip reports, and information about any tips that were not reported.

Step 2: Identify each employer. Enter the employer’s name and employer identification number as requested on the form.

Step 3: Calculate total tips received and reported. The form asks for total cash and charge tips received and the amount reported to the employer. Follow the instructions carefully, including the rules for tips reported late and allocated tips.

Step 4: Determine the amount subject to Social Security and Medicare taxes. The form guides you through the calculation. Certain tips, including tips below the monthly reporting threshold, receive different treatment for payroll-tax purposes.

Step 5: Calculate the applicable taxes. Use the form’s instructions to calculate the Social Security and Medicare taxes due. If you are also subject to Additional Medicare Tax, Form 8959 may be required.

Step 6: Transfer the amounts to your federal return. Report the tax and tip income on the appropriate lines of your federal income tax return, following the instructions for that tax year.

The calculations can vary depending on the type of employment, the amount of tips, and the applicable Social Security wage limit. Using the correct year’s form is essential.

Does the New Federal Deduction for Tips Eliminate These Taxes?

No. A change in federal tax law introduced a deduction for certain qualified tips for tax years 2025 through 2028. Eligible taxpayers may be able to deduct up to $25,000 of qualified tips, subject to income limits, occupation requirements, and other rules.

However, the deduction does not automatically eliminate Social Security or Medicare taxes on tips. Form 4137 still serves its purpose when an employee owes these payroll taxes on unreported tips.

The IRS also explains that qualifying tips reported on Form 4137 may count toward the new deduction, provided the taxpayer meets the applicable requirements. The deduction is not available for every tipped worker or every type of payment described as a tip.

For current guidance, see the IRS information on tips and the qualified tips deduction.

Common Mistakes to Avoid

Employees should be careful to avoid these frequent errors:

• Reporting only cash tips while overlooking credit-card tips.
• Assuming tips are tax-free because they were received in cash.
• Ignoring allocated tips in Box 8 of Form W-2.
• Failing to keep daily tip records.
• Confusing the qualified tips deduction with an exemption from payroll taxes.
• Using an outdated Form 4137 or failing to report tip income correctly on the federal return.

Accurate records and proper reporting can help prevent errors, unexpected tax bills, and potential IRS notices.

Get Help With Tip Income Reporting From AIM Financial

If you work in a tipped occupation and are unsure whether you need Form 4137, professional tax preparation assistance can help you understand your reporting responsibilities. The rules can be especially confusing when your W-2 includes allocated tips, some tips were not reported to your employer, or you may qualify for the new federal deduction for tips.

AIM Financial helps individuals and families in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan with federal and Michigan tax preparation. We can help you organize your tax documents, review tip income, and prepare your return with attention to applicable reporting requirements and potential tax benefits.

Contact AIM Financial for help with your next tax return. Properly reporting tip income can help you avoid unnecessary complications and make sure you understand which tax benefits may apply to your situation.

This article is for general educational purposes only. Individual tax obligations and eligibility for deductions depend on the applicable law and each taxpayer’s circumstances.