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Form 1040 - This form is the individual income tax return that each employee files every year. If you havent reported your tips by other means throughout the year, you must report them here. Form 4137 - Use this form in conjunction with a 1040 form to report tips and calculate the taxes you owe on your tipped income.
Tips are taxable income, and a failure to properly report your tip income could lead to the following issues: IRS audit of your return. Back taxes owed. Interest and penalties added to your tax debt.
What can happen if I dont report my tips to the IRS? If the IRS determines through an examination that you underreported your tips, you could be subject to additional federal income tax, social security and Medicare taxes, and maybe state income tax.
If youve started working as a food service employee, you might be wondering: Are tips taxable? The simple answer is yes, the IRS treats tips as taxable income. If you earn tips, then youre responsible for paying income, Social Security, and Medicare tax on that tip money.
If you did not report tips to your employer as required, you may be charged a penalty equal to 50% of the Social Security and Medicare tax due on those tips. For more information, please review Publication 531.
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An employee must use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount of any unreported tip income to include as additional wages on their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors, and the employee share of Social Security and
Tips are a frequently audited item, and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employees Daily Record of Tips and a Report to Employer for recording your tip income.
If it is determined in an examination that you underreported your tip income, the IRS will assess the taxes you owe based on the best available records of your employer. Tip income adds up. Underreporting could result in you owing substantial Federal Income, Social Security and Medicare penalties, and interest.
If you fail to report your tips to your employer, the IRS can impose a penalty equal to 50% of the Social Security and Medicare tax you fail to pay. And, if you didnt earn enough in wages and tips that your employer pays to you directly to cover your tax withholding, your W-2 will show how much tax you still owe.
The truth is, neglecting to declare cash tips, while it technically counts as tax fraud, is not likely to land someone in the slammer unless theyre earning some seriously good tips.

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