Are My Tips Taxable if I Wait Tables After School?

Income, regardless of its source, is generally considered taxable by tax authorities. This principle applies to wages earned from a regular job, as well as additional earnings such as tips. Understanding how tips are treated for tax purposes is important for individuals who receive them as part of their compensation.

Understanding Taxable Tips

Tips represent taxable income that individuals receive for services performed. The Internal Revenue Service (IRS) clarifies that tips are amounts freely given by customers, not mandatory service charges or fixed fees. Both cash and non-cash tips, including those paid via credit card or through tip-sharing, are considered taxable income.

For a payment to qualify as a tip for tax purposes, it must meet several criteria. The customer must provide the payment voluntarily, have the unrestricted right to determine the amount, and the payment should not be subject to negotiation or employer policy. This distinction means that automatic gratuities or service charges added to a bill are generally treated as regular wages, not tips, because the customer does not have discretion over the amount or payment.

Reporting Tips to Your Employer

Employees must report all cash tips received to their employer. This reporting is required if the total cash tips received from one employer amount to $20 or more in a calendar month. This threshold applies separately to each employer an individual works for.

The report must be provided to the employer by the tenth day of the month following the month in which the tips were received. While employers may have their own internal reporting systems, employees can use IRS Form 4070, “Employee’s Report of Tips to Employer.”

How Tips Are Taxed

Tips reported to an employer are subject to several types of taxes, including federal income tax, Social Security tax, and Medicare tax. Social Security and Medicare taxes, collectively known as FICA taxes, are withheld from wages and reported tips. For 2025, the employee’s portion of Social Security tax is 6.2% on earnings up to $176,100, and Medicare tax is 1.45% on all earnings, with no wage limit. Employers are also required to pay a matching share of these FICA taxes.

Employers are responsible for withholding these taxes from an employee’s reported tips. If the reported tips, combined with regular wages, are not sufficient to cover the tax liabilities, the employer may withhold the taxes from the employee’s regular wages. If an employer cannot collect all FICA tax due on reported tips, the uncollected amount will be noted on the employee’s Form W-2 in Box 12 (codes A for Social Security, B for Medicare). The employee then becomes responsible for paying these uncollected taxes when filing their annual tax return.

A new federal income tax deduction for “qualified tips” has been introduced for tax years 2025 through 2028. This provision allows eligible workers to deduct up to $25,000 in qualified tips from their income subject to federal income tax. This is a deduction claimed on the individual’s federal income tax return, and it does not eliminate the requirement for tips to be subject to federal income tax withholding or Social Security and Medicare taxes at the time they are earned.

Recordkeeping and Your Tax Return

Maintaining thorough records of all tips received is an important responsibility for employees. A daily tip log, whether a simple notebook or a digital application, helps ensure accuracy for tax reporting and can be useful in case of an IRS inquiry. This log should include both cash and non-cash tips, even though non-cash tips are not reported to the employer.

Tips reported to an employer will appear on an employee’s Form W-2. Specifically, reported tips are included in Box 1 (“Wages, tips, other compensation”), Box 5 (“Medicare wages and tips”), and Box 7 (“Social Security tips”). If an employer allocates tips to an employee, these amounts will typically be shown in Box 8 of Form W-2 and must also be reported on the individual’s tax return.

When preparing an annual tax return (Form 1040), all tip income, including any tips not reported to an employer because they were less than the $20 monthly threshold, must be included. For any tips that were not reported to the employer as required, individuals must use Form 4137, “Social Security and Medicare Tax on Unreported Tip Income,” to calculate and report the Social Security and Medicare taxes owed on those amounts. If a significant portion of income comes from tips and not enough tax is withheld from regular wages, individuals may need to make estimated tax payments throughout the year to avoid potential penalties.