If you’re in an industry where you are customarily tipped for your services, you are already probably familiar with how it works. You faithfully report your tips to your employer, and trust that the appropriate taxes are being withheld. While this is true in most cases, it is always a good idea to understand exactly what the tax implications are of being a tipped employee. Fortunately, a quick search of the IRS' website will turn up interactive tax assistant tools, publications and the most recent information and Social Security tips.
Social Security taxes are part of payroll deductions known as Federal Insurance Contributions Act, or FICA taxes. Because Social Security taxes are mandatory, the IRS does not allow you to deduct them on your taxes.
Taxes on Social Security Tips
The IRS considers any tips you receive to be part of your wages or income. This means that you are required to not only report tips totaling $20 or more per month to your employer, you may also have to pay taxes on this income. Your employer will deduct federal income, state and local tax as well as Medicare and Social Security taxes from your income. Because you include your tips along with your standard pay, the process of filing taxes on your tips is no different than it is for someone filing taxes on any other source of income.
Each year, the IRS releases income minimums that must be reached before you are required to file taxes. When your income reaches this threshold, depending upon your age and filing status, you must file a tax return for the year. There are, of course, Social Security loopholes for seniors, but these are an exception rather than a standardized rule for most working adults.
FICA Tax Rates
Social Security and Medicare contributions are collectively known as FICA, or Federal Insurance Contributions Act taxes, and are mandatory payroll deductions that both employees and employers must pay. Social Security accounts for 6.2 percent of this tax, and the Medicare contribution is 1.45 percent. Because employers and employees are responsible for making these contributions, the total amount of FICA taxes collected are 15.3 percent.
Social Security Tax Thresholds
There is a threshold on the amount of your income that is subject to Social Security tax. For tax year 2018, this amount is $128,400, up from the 2017 threshold amount of $127,200. However, beginning on January 1, 2019, this threshold increases by $4,500 to $132,900. It's important to note, there is, no limitation on the amount of your income that is subject to the other component of FICA tax – Medicare.
There is also a lesser known aspect of FICA taxes that are imposed on wages in excess of $125,000 for married filing separately status, and $250,000 for taxpayers who are married filing jointly. This 0.9 percent Medicare surtax, also known as the Additional Medicare Tax, went into effect on January 1, 2013, as a provision of the Affordable Care Act. Understanding social security benefits strategy options such as these are absolutely critical.
Tip Income Reporting
When you file taxes on your wages, including your allocated tips, you have to complete IRS Form 1040, "U.S. Individual Income Tax Return." To your 1040, you also need to attach IRS Form 4137, "Social Security and Medicare Tax on Unreported Tip Income." Use Form 4137 to report tips allocated to you by your employer, based on the amount in Box 8 of your Form W-2, "Wage and Tax Statement," that employers are required to send out to employees by January 31 of the new year.
Because Social Security taxes, along with Medicare contributions, are mandatory payroll taxes, the IRS does not allow you to deduct these on your tax return. You can include federal income taxes that you have paid in the year, in hopes of a refund, but Social Security and Medicare taxes cannot be deducted.
- IRS: Topic No. 761 Tips – Withholding and Reporting
- IRS: Tip Recordkeeping and Reporting
- IRS: Topic No. 401 Wages and Salaries
- IRS: Is My Tip Income Taxable?
- IRS: 2018 Form 4137, Social Security and Medicare Tax on Unreported Tip Income
- IRS: What is the Additional Medicare Tax?
- IRS: Affordable Care Act Tax Provisions
- SSA: OASDI and SSI Program Rates & Limits, 2018
- SHRM: SSA Revises Payroll Tax Cap for 2018; Tax Law Alters Rates and Brackets
- Social Security Administration. "What Are FICA and SECA Taxes?" Accessed April 1, 2020.
- Social Security Administration. "2021 SOCIAL SECURITY CHANGES." Accessed Oct. 15, 2020.
- Internal Revenue Service. "Topic No. 751 Social Security and Medicare Withholding Rates." Accessed Nov. 5, 2020.
- Social Security Administration. "Supplemental Security Income Overview." Accessed April 1, 2020.
Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.