As a server, bartender, or waitress, you probably earn most of your income from tips. People can leave tips in many ways, including cash. It may be tempting to leave this amount out when you’re calculating your gross income. But the fact is, the IRS wants to know all your income – including tips.
Under the One Big Beautiful Bill (OBBB), a new provision being referred to as “no tax on tips” was introduced in 2025. Despite its nickname, it doesn’t make tips completely tax-free. It allows eligible workers to deduct up to $25,000 of qualified tip income from their federal taxable income.
Are tips taxable income?
Yes. The IRS assumes that if you work in a restaurant or similar industry, you will earn tips at an average of 8%. If you regularly report tips under this amount or don’t report any tips, the IRS may investigate.
There are other types of gratuity that you might receive. These can include:
- Tickets to a game or event
- Vouchers or coupons
- Other non-cash items
You do not have to report these as income to your boss, but you are still responsible for reporting the fair market value to the IRS.
If your restaurant includes service charges for large parties, you are not required to report it to your employer because it is already accounted for and should be included in your wages. But, if the customer leaves you an additional tip on top of the service charge, you will need to report that.
What should be included as tip income for my taxes?
Tips are usually paid through credit/debit card or with cash.
What about shared or pooled tips?
If you receive a pooled tip or share your tips with your team, you are only responsible for reporting what you actually bring home. For example, let’s say you make $150 for one table but give $40 to the bartender and $20 to the busser. In that case, you will only report the $90 you took home.
How does the ‘no tax on tips’ deduction work?
You may have heard “no tax on tips” as a popular way to describe the newest tax law that allows eligible workers to exclude up to $25,000 in tip income from their taxable income between 2025 and 2028. This means that qualified tips can be deducted from your federal income tax calculations. However, it’s important to note that these tips remain subject to employment taxes, including Social Security and Medicare.
The deduction begins to phase out once a taxpayer’s Modified Adjusted Gross Income (MAGI) exceeds $150,000, or $300,000 for those filing jointly. The deduction is not available for those making above $400,000 as a single filers or joint filers making above $550,000.
To claim the tip income deduction, report all your tips on your tax return using the W-2 your employer provides. Then, use Form 1040 to deduct up to $25,000 in qualified tips from your taxable income.
How do I report tips to my employer?
You can use Form 4070A to track of your tips as you earn them. Then, use Form 4070 to report them to your employer by the 10th day of the following month. So, to report tips you earned in January, turn your Form 4070 in by February 10th.
What is the tax rate on tips?
Tips are taxed just like regular income. That means they’re subject to federal income tax, based on your tax bracket. So, if you earn tips, they get added to your total income and taxed at the same rate as your wages.
How to report tips to your employer or the IRS
All tips should be included in your taxable income, regardless of who you report them to.
To your employer
If you make more than $20 in tips per month, report them directly to your employer. This will allow your boss to keep track of expenses and sales and also help them to correct your tax withholding percentage.
You can use Form 4070A to track of your tips as you earn them. Then, use Form 4070 to report them to your employer by the 10th day of the following month. So, to report tips you earned in January, turn in your Form 4070 by February 10th.
If you earn tips from more than one job, you’ll need to treat each one separately. That is, you won’t add up your tips from different jobs. You will report your gratuity for each job individually.
To the IRS
If you make less than $20 in tips per month, it will not impact your tax bill the same way. You can report these directly to the IRS using Form 4137.
Are taxes withheld from my tip income?
If you are earning more than $20 per month in tips, your employer should withhold FICA tax for Social Security and Medicare. This is why it is so important for you to report gratuity to your employer. They can withhold the right amount of tax during the year, so you won’t get hit with a surprise tax bill when you file.
What is the penalty for not reporting tips?
If you fail to report your tips, the IRS can fine you as much as 50% of the tax (Medicare and Social Security) you were supposed to pay on that amount.
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