Do I have to pay tax on tips?
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Yes, you generally have to pay tax on tips. Under the Internal Revenue Code, all tips you receive are considered taxable income and must be included in your gross income for federal income tax purposes. This includes:
- Tips received directly from customers (cash or non-cash, such as tickets or passes)
- Tips added to credit or debit card charges and paid out by your employer
- Tips received from other employees through tip-splitting or tip-pooling arrangements
1. Reporting Requirements:
- Daily Recordkeeping:
You are required to keep a daily record of all tips you receive. This includes cash tips, tips from credit/debit cards, and the value of non-cash tips. You should also record any tips you pay out to other employees as part of a tip pool or tip-splitting arrangement. - Reporting to Your Employer:
If you receive $20 or more in tips in a calendar month from any one job, you must report the total amount of tips to your employer by the 10th day of the following month. This allows your employer to withhold the appropriate federal income tax, Social Security tax, and Medicare tax on your reported tips. If your total tips for a month are less than $20, you are not required to report them to your employer, but you still must report them as income on your tax return. - Reporting on Your Tax Return:
All tips you receive—whether or not you report them to your employer—must be reported as income on your federal tax return. Tips reported to your employer will be included in the wages box on your Form W-2. Any tips you did not report to your employer must be added to your wages on your tax return, and you must also calculate and pay the employee share of Social Security and Medicare taxes on those unreported tips using Form 4137.
2. Non-Cash Tips:
The value of non-cash tips (such as tickets or passes) is also taxable and must be included in your income, even though you do not report these to your employer.
3. Service Charges
Amounts your employer adds to a bill as a service charge (for example, an automatic 18% gratuity for large parties) are not considered tips. These are treated as regular wages, not tips, and are subject to withholding and payroll taxes.
4. Penalties
If you fail to report tips to your employer as required, you may be subject to a penalty equal to 50% of the Social Security and Medicare taxes due on the unreported tips, in addition to the taxes owed.
5. Special Rule for 2025–2028
For tax years 2025 through 2028, the One Big Beautiful Bill Act (OBBBA) allows a deduction of up to $25,000 per year for qualified tip income, subject to a phaseout at higher incomes. This means you may be able to deduct a portion of your tip income from your taxable income, but you are still required to report all tips as income and follow the standard reporting and withholding rules.
Summary:
- All tips are taxable and must be reported as income.
- Tips of $20 or more per month per employer must be reported to your employer.
- All tips (including those not reported to your employer and non-cash tips) must be reported on your tax return.
- For 2025–2028, you may be eligible for a deduction of up to $25,000 of qualified tip income, but you must still report all tips.
Failure to comply with these requirements can result in penalties and additional taxes owed.
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