How Tips Are Taxed
Tips are taxed as wages: cash tips, card tips and tips shared through a tip pool. Tips under $20 a month at one employer need no report to the employer, but still count as income.
- Report: employees report tips to the employer by the 10th of the next month (IRS Form 4070).
- Withhold: the employer withholds income tax, 6.2% Social Security and 1.45% Medicare on reported tips from regular wages.
- Deduct: on the federal return, Schedule 1-A deducts qualified tips up to $25,000.
No Tax on Tips Deduction
The no tax on tips deduction is a federal income tax deduction of up to $25,000 of qualified tips per return, created by the One Big Beautiful Bill Act for tax years 2025 through 2028.
- Who qualifies: workers in occupations that customarily received tips before 2025, listed by the Treasury Department, such as servers, bartenders and hairstylists.
- Phase-out: the deduction falls by $100 for each $1,000 of modified AGI above $150,000 ($300,000 joint).
- Not covered: Social Security, Medicare and state income tax still apply to every tip.
The deduction is available with the standard deduction; itemizing is not required.
Tip Tax Examples
| Wages + tips | Tax on the tips | Take-home / year |
|---|---|---|
| $18,000 + $12,000 | $918 | $27,515 |
| $22,000 + $18,000 | $1,377 | $36,350 |
| $25,000 + $30,000 | $2,825 | $49,372.50 |
| $30,000 + $45,000 | $5,842.50 | $65,442.50 |
Single filer, no state income tax. Tips above $25,000 pay federal income tax at the normal rates.
Tax on Tips by State
State income tax on tips depends on the state, because the federal tip deduction is a federal rule. Each state decides whether to follow it; the calculator applies the state rate to all tips.
| State | Tax on $18,000 of tips | Take-home / year |
|---|---|---|
| Texas | $1,377 | $36,350 |
| Arizona | $1,827 | $35,350 |
| Pennsylvania | $1,929.60 | $35,122 |
| Illinois | $2,268 | $34,370 |
Single server, $22,000 of wages. In Texas the only tax on the tips is FICA; in the other states the flat state rate is added on top.
Tip Tax for Married Couples
A married couple filing jointly shares one $25,000 tip deduction on the return and gets the larger joint standard deduction.
The same $22,000 of wages and $18,000 of tips on a joint return in Texas owe $0 of federal income tax and keep $36,940 a year. Only the $1,377 of FICA on the tips remains.
- Married filing separately: cannot claim the tip deduction.
- Social Security number: the worker needs a valid one, and it must be on the return.
When the Tip Deduction Shrinks
The tip deduction drops by $100 for every $1,000 of modified AGI over $150,000, or over $300,000 on a joint return.
Tip deduction = $25,000 − $100 × (MAGI over the threshold ÷ $1,000)
A single bartender with $120,000 of wages and $40,000 of tips has $160,000 of income. The limit falls to $24,000, and the take-home is $126,386. The deduction reaches zero at $400,000 single and $550,000 joint.
What Counts as a Qualified Tip
A qualified tip is a voluntary cash or card tip in an amount the customer chooses, earned in an occupation the Treasury lists as customarily tipped.
- Counts: cash tips, tips added on a card, and tips received from a tip pool or tip sharing.
- Does not count: a mandatory service charge, such as an automatic gratuity for a large party. That is wages, fully taxed.
- Proof: the tips must be reported on Form W-2, Form 1099 or Form 4137.
The Employer Tip Credit
The federal tipped minimum wage is $2.13 an hour in cash wages, with tips covering the rest of the $7.25 minimum. The gap the tips fill, $5.12, is the tip credit.
The rule applies to an employee who regularly receives more than $30 a month in tips. If tips plus cash wages fall short of $7.25 for any workweek, the employer must pay the difference. Many states set a higher cash wage or ban the tip credit; the Minimum Wage Calculator lists each state's rate.
Allocated Tips and Unreported Tips
Allocated tips are tips a large food or beverage employer assigns to staff when reported tips fall below 8% of gross receipts. They appear in box 8 of Form W-2, with no tax withheld on them.
Tips not reported to the employer, including allocated tips, go on Form 4137 with the tax return. That form computes the Social Security and Medicare owed on them, so the payroll tax is paid even when the employer never saw the tips.
Frequently Asked Questions
Are tips taxed in 2026?
Yes. Tips are subject to Social Security, Medicare and state income tax in 2026. Up to $25,000 of qualified tips is deductible from federal income tax.
How much tax do I pay on tips?
You pay 7.65% FICA on every reported tip, plus state tax and federal income tax on tips above the $25,000 deduction.
Do I have to report cash tips?
Yes. Cash tips are taxable income and must be reported to the employer when they reach $20 in a month, and on the tax return in every case.
Is there no tax on tips in 2026?
Partly. Federal income tax is removed on up to $25,000 of qualified tips for 2026, but Social Security, Medicare and most state taxes still apply.
Is an automatic gratuity a tip for the deduction?
No. A mandatory service charge is wages, not a tip, so it does not qualify for the tip deduction and is taxed in full.
Can I claim the tip deduction if married filing separately?
No. Married couples must file a joint return to claim the deduction for qualified tips.
What is the FICA tip credit?
The FICA tip credit is an employer income tax credit for the employer share of Social Security and Medicare paid on tips above the amount needed to reach a $5.15 hourly wage. It does not change the tax a worker pays.
Should a restaurant tip be figured before or after sales tax?
Either is allowed; no law sets the base of a restaurant tip. On a $60 bill with $4.80 of sales tax, 20% is $12 before tax and $12.96 after.