If you don't report your tips, you still owe tax on them. You also risk a penalty equal to 50% of the Social Security and Medicare taxes owed on tips you didn't report to your employer, plus interest, and accuracy penalties if the income is missing from your return. Reporting late on Form 4137 limits the damage.
Key takeaways
- All tips are taxable income, including cash tips and card tips.
- Cash tips of $20 or more a month must be reported to your employer by the 10th of the following month.
- The penalty for not reporting tips to your employer is 50% of the Social Security and Medicare tax on those tips (Publication 531).
- Form 4137 is how you pay Social Security and Medicare tax on tips you didn't report to your employer.
- Unreported tips also don't count toward your future Social Security benefits.
Two different reporting duties
| Duty | Rule | If you skip it |
|---|---|---|
| Report tips to your employer | Written report by the 10th of the next month when cash tips are $20+ that month | Penalty of 50% of the Social Security and Medicare tax owed on those tips |
| Report tips on your tax return | All tips go on Form 1040; unreported ones go through Form 4137 | Back taxes and interest, plus possible accuracy-related penalties |
The 50% penalty for not reporting tips to your employer
IRS Publication 531 says that if you don't report tips to your employer as required, you may owe a penalty equal to 50% of the Social Security, Medicare, Additional Medicare, or railroad retirement taxes you owe on the unreported tips, on top of the taxes themselves. You can avoid it by showing reasonable cause, which you explain in a statement attached to your return (https://www.irs.gov/publications/p531).
Example
A bartender kept $4,000 of cash tips off their employer reports. The employee share of Social Security and Medicare on those tips is $4,000 × 7.65% = $306. They pay that $306 with Form 4137, and if the IRS assesses the penalty, it is 50% of $306 = $153. Federal income tax on the $4,000 is owed as well, and so is interest if it's paid late.
How to fix unreported tips
- Add the tips to your income on Form 1040 and complete Form 4137 to figure the Social Security and Medicare tax on them (https://www.irs.gov/forms-pubs/about-form-4137).
- If the tips were for a year you've already filed, file an amended return (Form 1040-X) with Form 4137.
- If you had a good reason for not reporting to your employer, attach a reasonable-cause statement.
- Start reporting tips to your employer by the 10th of each month from now on.
Unreported tips you report on Form 4137 can still count as qualified tips for the No Tax on Tips deduction if you're otherwise eligible. See our Form 4137 guide: https://ttoccodes.com/blog/form-4137-for-underreported-tips .
What employers face
If an employee doesn't report tips, the employer isn't liable for the employer share of Social Security and Medicare on those tips until the IRS issues a notice and demand (Revenue Ruling 2012-18). Employers do have to include reported tips in W-2 Boxes 1, 5, and 7 and file correct Forms W-2 and, for large food or beverage establishments, Form 8027 (https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting).
What is the penalty for not reporting tips?
Publication 531 sets the penalty for not reporting tips to your employer at 50% of the Social Security and Medicare taxes owed on the unreported tips, in addition to the taxes. Leaving tips off your tax return can also bring interest and accuracy-related penalties.
Can I report tips I forgot on last year's return?
Yes. File Form 1040-X for that year, include the tips in income, and attach Form 4137 to pay the Social Security and Medicare tax. Paying sooner reduces interest, and a reasonable-cause statement may avoid the 50% penalty.
Does the IRS know about my cash tips?
The IRS can estimate tips from your employer's sales, Form 8027 data, and allocated tips shown in W-2 Box 8. Large food and beverage establishments must allocate tips when reported tips fall below 8% of gross receipts, which often flags underreporting.
This article is general information, not tax advice. Rules can change; confirm your situation with the current IRS instructions linked above or a tax professional.