What to Do With Cash Tips: From Reporting to Taxes

When you receive cash tips as part of your income, understanding how to manage, report, and pay taxes on these earnings is important. Tips, whether received directly from customers, distributed through tip-sharing arrangements, or paid via electronic methods like credit cards, are considered taxable income by the Internal Revenue Service (IRS). Properly handling these funds ensures compliance with tax regulations and supports your overall financial well-being. This involves meticulous record-keeping and timely reporting to both your employer and the IRS.

Keeping Accurate Records of Your Tips

Maintaining a detailed daily record of all tips received is foundational for tax compliance and personal financial management. This record should encompass the date, the total amount of tips you received, and the source of those tips, such as cash directly from customers or distributions from tip pools. It is also beneficial to note any amounts you paid out to other employees as part of a tip-sharing agreement.

You can utilize various methods for this daily tracking, including a simple logbook, a spreadsheet, or a mobile application. The core requirement remains for employees to keep a daily log of all tip income. Accurate and consistent record-keeping provides verifiable documentation for reporting to your employer and for your annual tax return.

Reporting Tips to Your Employer

Employees are legally required to report all cash tips totaling $20 or more received in a calendar month to their employer. This reporting ensures your employer can correctly withhold federal income, Social Security, and Medicare taxes from your wages. The report must be submitted to your employer by the 10th day of the month following the month in which the tips were received. If the 10th falls on a weekend or holiday, the deadline shifts to the next business day.

Although no specific IRS form is mandated for this reporting, employers often use a system similar to IRS Form 4070 or provide their own internal reporting method. Your report should include your name, address, Social Security number, the employer’s name and address, the period covered, and the total tips received. Once reported, these tips are included with your regular wages for tax withholding and appear on your annual Form W-2.

Reporting Tips on Your Tax Return

All tips you receive, regardless of the amount or whether they were reported to your employer, are considered taxable income and must be included on your annual tax return. Tips reported to your employer are typically included in Box 1 of your Form W-2, along with your regular wages, and are then transferred to your Form 1040. This ensures that income, Social Security, and Medicare taxes are appropriately accounted for.

If you received cash tips of less than $20 in a month from any single employer, or if you did not report all your tips to your employer, these “unreported tips” must still be declared. You will use IRS Form 4137 to calculate and report the Social Security and Medicare taxes owed on these amounts. This includes any allocated tips shown in Box 8 of your Form W-2, as no tax is withheld from these amounts by your employer. Failure to accurately report all tip income can result in penalties.

For tax years 2025 through 2028, a new provision allows eligible workers to deduct a portion of their tip income from federal income tax, potentially up to $25,000. This deduction applies only to federal income tax liability and does not exempt tip income from Social Security and Medicare taxes, which remain applicable. These taxes, also known as FICA taxes, are applied to your wages and tips.

Managing Your Physical Cash Tips

Beyond the reporting and tax obligations, effectively managing the physical cash tips you receive is a practical financial step. Regularly depositing your cash tips into a bank account can enhance safety by reducing the amount of cash you carry. This practice also creates a clear financial record, which can simplify personal budgeting and tracking your income.

Setting aside a portion of your cash tips for future tax obligations is a prudent strategy, especially if a significant amount of your tip income is not subject to immediate withholding by your employer. This proactive approach helps prevent a large tax bill at the end of the year. Budgeting for irregular income streams, such as tips, by planning for both higher and lower earning periods can also contribute to financial stability.