Figuring Taxes on Tips
To figure the tax on tips, find out if the taxpayer, during any month, received $20 or more in cash and charge tips that were not reported to the employer. Enter this amount on Form 4137 to figure the social security and Medicare taxes.
Report the tax amount on the applicable line on Form 1040.
As part of your interview, explain to taxpayers that sometimes people do not realize they owe taxes on tips they did not report to their employer. Also, explain the taxes paid on those tips actually boosts the taxpayer's future social security benefits.
The tax software will compute the correct tax on allocated and unreported tip income. Go to the Volunteer Resource Guide, Income tab, How to Enter Tips, for software entries.