How Much Are Tips Taxed in California?

Tips are optional payments customers provide to employees. For tax purposes, these payments are considered taxable income, similar to regular wages. This article clarifies tip taxation relevant to California.

Understanding Federal Tip Taxation

Tips are fully taxable income under federal law, treated by the Internal Revenue Service (IRS) as regular wages. This means tips are subject to federal income tax withholding, which employers deduct from an employee’s pay. The amount withheld depends on the employee’s Form W-4.

Tips are also subject to Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. For 2025, the Social Security tax rate is 6.2% for employees and 6.2% for employers, applied to wages up to an annual limit of $176,100. The Medicare tax rate is 1.45% for employees and 1.45% for employers, with no wage base limit. An extra 0.9% Medicare tax applies to employee wages exceeding $200,000, or $250,000 for those married filing jointly. Employers withhold the employee’s share of these FICA taxes from reported tips and pay their matching employer share.

Employees must report all cash tips totaling $20 or more received in a calendar month from a single employer. This allows the employer to withhold necessary federal income and FICA taxes. Non-cash tips, such as tickets or other items of value, are also taxable income, but employees do not report these to their employer for withholding purposes.

California State Income Tax on Tips

California generally aligns with federal guidelines, meaning tips are subject to California state income tax. This income is treated similarly to other wages and is subject to the state’s progressive income tax rates.

California’s income tax withholding process also applies to tip income, requiring employers to deduct state taxes from an employee’s pay. The specific amount withheld depends on the employee’s earnings, including tips, and their withholding allowances. California has its own separate tax rates and withholding schedules.

Reporting Tips to Tax Authorities

Employees must report all cash and charged tips of $20 or more received in a month to their employer by the 10th day of the following month. Employees can use IRS Form 4070, Employee’s Report of Tips to Employer, or maintain a detailed daily record, often using Form 4070A, Employee’s Daily Record of Tips. This daily record should include direct cash tips, credit/debit card tips, and amounts from tip-sharing arrangements.

Reported tips are included on an employee’s Form W-2, Wage and Tax Statement, at the end of the year. They contribute to the amount shown in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social Security tips).

Certain employers, particularly large food or beverage establishments, must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, with the IRS. This form reports gross receipts and total tips reported by employees. If reported tips are less than 8% of the establishment’s gross receipts, the employer must “allocate” the difference among employees, shown in Box 8 of Form W-2. These allocated tips are not subject to withholding by the employer but must be reported as income by the employee. Failure to report tip income can lead to penalties, including a 50% penalty on the Social Security and Medicare taxes owed on the unreported amounts.