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If you earn tips from customers, you might not think about taxes right away. But here’s the truth: all tips are taxable income . That means the government requires you to report them just like your regular paycheck. Failing to do this can lead to fines or even legal issues.
This guide is for anyone in the U.S. who gets tips—like servers, delivery drivers, bartenders, or taxi drivers. Whether you work for an employer or run your own business, understanding how to handle tip taxes is essential.
Why Does It Matter?
- It’s the Law : The IRS (U.S. tax agency) treats tips as income. Even small amounts add up over time.
- Avoid Penalties : If you don’t report tips, the IRS may charge interest or fines.
- Fairness : Everyone pays taxes on their earnings to support public services like schools, roads, and healthcare.
What You Need to Know About Tips and Taxes
A tip is extra money a customer gives you for doing a good job. It’s not part of your regular salary. For example, if you’re a waiter and a customer gives you $5 after their meal, that $5 is a tip.
But not all money you get is a tip. Here’s how to tell the difference:
- Tips are given freely by customers—like cash, card payments, or app tips.
- Not tips include your regular pay from your boss, bonuses from your job, or the full price paid for a service (like a taxi fare).
Who Usually Gets Tips?
Tips are common in jobs where you work directly with customers. These jobs include:
- Waiters and servers
- Bartenders
- Delivery drivers
- Taxi or ride-share drivers
- Hairdressers and barbers
- Housekeepers and hotel workers
If you work in one of these jobs, the IRS calls you a tipped employee. That means you must follow special rules for reporting your tip income and paying taxes.
What Is a “Tip Credit”?
In some states, your boss might not pay you the full minimum wage. Instead, they can use your tips to make up the rest. This is called a tip credit.
For example, if the minimum wage is $7.25 per hour and your boss pays you $2.13, they expect you to earn at least $5.12 per hour in tips. That way, your total hourly income adds up to $7.25.
But here’s the important part:
- If you don’t earn enough in tips, your boss must pay you the difference.
- Your employer must also report your tips to the IRS and take out the right taxes.
Check our free tool: Tip Calculator
What About Cash Tips?
Cash tips count too! You must report your cash tips to your boss every day. For example, if you get $30 in cash tips on Monday, tell your manager that same day.
If you don’t report them, your employer may still report them as income—and you’ll still owe taxes. So it’s better to be honest and report your tips daily.
How to Report Tips to the IRS
Reporting your tips is very important because the IRS treats tips as taxable income. If you work for an employer and earn $20 or more in tips, you must report it properly to avoid trouble. Self-employed workers must report all tips as business income and pay taxes on their own. Whether you’re an employee or freelancer, accurate tip reporting helps you avoid fines and stay safe with the IRS. Here’s a simple table to help you understand what to do in different situations:
| Situation | What You Must Do | Tax Forms Involved |
|---|---|---|
| A. Employee – Daily Tips | Report cash tips of $20 or more per day to employer by end of day | Your employer adds it to W-2 |
| A. Employee – Monthly Tips | Report total tips (cash + card/app) of $20 or more in a month by 10th next month | Your employer withholds tax |
| A. Unreported Tips | Use Form 8919 to report missed tips during tax filing | IRS may also get Form 4161 |
| B. Self-Employed Tips | Report all tips as income on Schedule C (Form 1040) | Pay self-employment tax + income tax |
| B. Quarterly Tax Payment | Use Form 1040-ES to pay estimated tax four times a year | April, June, Sept, Jan |
| C. If Not Reported | IRS may audit or fine; employers may also face penalties | Penalties + interest charges possible |
How Taxes Are Calculated on Tips
Now that you know how to report tips, let’s break down how much tax you’ll actually pay on your tip income. This section explains the math in simple terms, step by step.
A. Taxes for Employees
If you work for an employer and earn tips, your taxes are handled similarly to regular pay. Here’s how it works:
- Federal Income Tax
- Your employer will withhold federal income tax based on your total income (wages + tips).
- The amount withheld depends on your tax bracket (how much you earn total). For example:
- If you earn $100 in tips, your tax might be around 12% to 22%, depending on your total income.
- Example: If you earn $2,000 in tips and are in the 12% tax bracket, your federal tax could be about $240.
- Social Security and Medicare Taxes (FICA)
- These are fixed taxes taken from your income.
- Social Security : 6.2% of your tip income.
- Medicare : 1.45% of your tip income.
- Together, this is 7.65% of your tip income.
- Example: If you earn $200 in tips, your FICA tax would be $15.30 (7.65% of $200).
- These are fixed taxes taken from your income.
- Total Withheld Taxes
- Your employer will combine federal, Social Security, and Medicare taxes and deduct them from your paycheck.
- At the end of the year, these amounts will be reported on your W-2 form .
B. Taxes for Self-Employed Individuals
If you earn tips as a freelancer or gig worker, you’re responsible for calculating and paying your own taxes. Here’s what you need to know:
- Self-Employment Tax (15.3%)
- You must pay 15.3% of your tip income for Social Security (12.4%) and Medicare (2.9%).
- Example: If you earn $1,000 in tips, your self-employment tax is $153.
- Federal Income Tax
- You’ll also pay federal income tax on your tip income, just like employees.
- The tax rate depends on your total income (business income + other income).
- Example: If you earn $5,000 in tips and are in the 10% tax bracket, you’ll pay $500 in federal income tax.
- Estimated Tax Payments
- Since no one is withholding taxes for you, you must pay quarterly using Form 1040-ES .
- Example: If you earn $4,000 in tips for the year, you might pay $300 each quarter (April, June, September, January).
C. State and Local Taxes
- Most states also tax tip income. The rates vary:
- California : 8–13% state income tax.
- Texas : No state income tax.
- New York : 8.82% state income tax (plus local taxes in cities like NYC).
- Always check your state’s rules to avoid surprises.
D. What If You Underreported Tips?
The IRS may ask for proof (e.g., bank statements, receipts) to verify your income.
If you didn’t report all your tips to your employer, you can still report them on your tax return using Form 8919 .
How to Keep Records of Your Tips
Keeping track of your tips helps you file accurate taxes and stay out of trouble with the IRS. Good records act as proof of income, help avoid penalties, and make it easier to calculate how much tax you owe. Whether you’re an employee or self-employed, recording both cash and digital tips is a smart habit. Use tools like journals, apps, or bank statements to stay organized. The IRS recommends keeping records for at least 3 years, or 7 years in case of an audit.
Tip Record-Keeping Summary Table
| Section | What You Should Do | Examples / Tools |
|---|---|---|
| Why It Matters | Proves income to IRS, avoids penalties, helps track taxes | Audit support, estimated tax planning |
| What to Record – Cash Tips | Write daily tip amounts | April 5 – $45 cash tips |
| What to Record – Card/App Tips | Save receipts or screenshots from apps | April 6 – $30 app tip via Uber |
| Total Earnings | Add up all tips weekly or monthly | April Total – $1,200 |
| Tools to Use | Tip journal, mobile apps, or bank statements | QuickBooks, Excel, Venmo history |
| What to Save | Logs, receipts, bank records, and tax forms | W-2, Schedule C, digital receipts |
| Forgot to Track? | Estimate missing days based on usual earnings | $100/day × 5 days = $500 |
| Self-Employed Tip Tracking | Record tips, expenses, and net income | Include gas, vehicle, and phone costs |
| How Long to Keep Records | Keep for 3 years (or 7 years for audits) | Store in physical folder or digital cloud |
What Happens If You Don’t Report Tips?
If you don’t report your tips, you could face serious consequences. The IRS treats unreported income very seriously. You may be charged interest on unpaid taxes, which adds up each month, and face accuracy-related penalties if the IRS believes you underreported on purpose. For example, failing to report $500 in tips could cost you an additional 20% penalty—plus interest. Even cash tips, which are harder to track, must be reported. If not, the IRS may estimate your income and charge you based on that, whether it’s accurate or not.
Related Reads: Tipping Guide for Delivery Drivers and Ride-Share Riders
Even if your employer doesn’t report your tips properly, you are still responsible. You’ll need to show records like tip logs, credit card receipts, or bank statements during an audit. If you’ve made a mistake, it’s best to fix it quickly using IRS Form 8919 and pay any owed taxes. Reporting tips correctly protects you from penalties, keeps your job secure, and helps you stay within the law. It’s always smart to keep good records and, if needed, consult a tax professional for help.
State and Local Tax Rules for Tips
While the IRS handles federal taxes on tips, state and local governments also tax tip income . These rules vary widely depending on where you live. Let’s break down what you need to know.
A. State Income Taxes on Tips
- Most U.S. states tax tip income just like regular wages.
- Tax Rates Differ :
- High-Tax States :
- California : 1–13% (depending on income level).
- New York : 8.82% state tax + up to 3.876% in local taxes (e.g., NYC).
- Low or No Tax States :
- Texas : No state income tax (tips are still taxed at the federal level).
- Florida : No state income tax.
- High-Tax States :
B. How Employers Handle State Taxes
- If you work for an employer:
- Your employer will withhold state income tax from your tips (if required by your state).
- This amount will appear on your W-2 form (in boxes 15–18).
- Example: If you work in Illinois and earn $200 in tips, your employer may withhold ~4.95% for state taxes.
C. What About Cities and Counties?
- Some cities add local income taxes on top of state taxes.
- Example: Pittsburgh, PA adds a 1.5% local income tax on all income, including tips.
- Example: New York City adds a 3.876% local tax on top of the state rate.
D. Sales Tax on Tips (Rare)
- In most cases, sales tax does not apply to tips . Tips are considered service fees, not taxable goods.
- However, some states may tax services (e.g., haircuts, dry cleaning), but the tip itself is usually not taxed.
E. Special Rules for Self-Employed Workers
- If you earn tips as a freelancer or gig worker:
- You must report state and local taxes on your tip income.
- Use Schedule C (Form 1040) to calculate your total income and state tax liability.
- Example: If you earn $3,000 in tips in Ohio, you’ll pay ~3.9% in state taxes ($117) plus any local taxes.
F. What to Do If You’re Uncertain
- Check Your State’s Website : Most states have free online tools to calculate tax rates.
- Example: California Franchise Tax Board or New York Department of Taxation and Finance .
- Use the Correct Forms : Your employer or tax software will handle most of this, but double-check your W-2 or Schedule C.
- Consult a Tax Professional : If you live in a state with complex rules (e.g., New York, California), a CPA can help you avoid mistakes.
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G. Common Pitfalls to Avoid
- Forgetting Local Taxes : Some cities add small taxes that can add up over time.
- Not Adjusting Withholdings : If you move to a new state, inform your employer to update tax withholdings.
- Self-Employed Overlook : Always calculate state taxes when preparing quarterly payments.
Frequently Asked Questions (FAQs)
1. What if I earn tips in cash? How do I report them?
If you earn $20 or more in cash tips in a single day, you must report it to your employer by the end of that day. For example, if you earn $30 in cash tips on Monday, tell your manager before Tuesday starts.
2. What happens if I don’t report my tips to my employer?
Your employer may assume you didn’t earn those tips and report less income. If the IRS audits you, you could owe taxes, interest, or penalties. Always report your tips to avoid problems.
3. Do I need to report tips to my employer every month?
Yes. If you earn $20 or more in total tips (including credit card and app tips) in a month, you must report it to your employer by the 10th day of the next month.
4. Are tips taxed at a higher rate than regular pay?
Tips are taxed the same way as regular income. For employees, taxes (federal, Social Security, Medicare) are withheld from tips. For self-employed workers, you pay 15.3% self-employment tax on tips plus federal income tax.
5. How do I calculate self-employment tax on my tips?
Self-employment tax is 15.3% of your tip income. For example, if you earn $1,000 in tips, your self-employment tax is $153 (12.4% for Social Security + 2.9% for Medicare).
6. Do I need to pay quarterly taxes if I earn tips?
Yes, if you’re self-employed or earn tips outside of regular pay. Use Form 1040-ES to pay taxes four times a year (April, June, September, January). Employees usually don’t need to pay quarterly taxes.
7. Can I deduct business expenses from my tip income?
If you’re self-employed, yes! You can deduct costs like gas, phone bills, or uniforms from your tip income to lower your taxable amount. Keep receipts and track expenses carefully.
8. What if my employer doesn’t pay me the full minimum wage?
Employers can use a tip credit to reduce their wage obligation. For example, if the minimum wage is $7.25/hour and your employer pays $2.13/hour, they can use the $5.12/hour difference as a tip credit—but only if you earn enough tips to cover it.
9. Do I have to report tips from ride-hailing or delivery apps?
Yes. Tips earned through apps like Uber, DoorDash, or Postmates are taxable income. Save app receipts and report them on Schedule C (Form 1040) if you’re self-employed.
10. How do I prove I earned tips if I don’t have receipts?
Keep a daily log of tips, bank statements showing deposits, or screenshots from apps. If you forget to track some tips, estimate based on your average daily earnings and use Form 8919 to report them.
Closing Notes
Reporting tips properly is one of the easiest ways to stay tax-compliant and avoid penalties. Whether you earn cash, credit card, or app-based tips, all must be reported as income. If you’re employed, your boss will usually handle tax withholdings—just be sure to report your tips on time. If you’re self-employed, you’re responsible for setting aside money and making quarterly payments. Keeping good records—like a daily tip log or bank statements—is key to staying on track.
Many workers make small mistakes like forgetting to report a few dollars or relying only on memory. These can lead to audits or unexpected tax bills. That’s why it’s smart to know your state and local tax rules and use tools or apps to track income. If you’re ever unsure, ask your employer, visit IRS.gov, or consult a tax professional. Staying organized and proactive keeps your taxes under control—and your mind at ease.