Tips are taxed as income. Cash tips, card tips, and tips shared through a tip pool are subject to federal income tax, and tips you report to your employer are also subject to Social Security and Medicare taxes. From 2025 through 2028, eligible workers can deduct up to $25,000 of qualified tips from federal income tax, but Social Security and Medicare taxes still apply.
Key takeaways
- All cash and non-cash tips are income. "Cash tips" includes tips paid by credit card, debit card, check, or payment app.
- Report cash tips to your employer by the 10th of the following month if they total $20 or more in a month.
- Reported tips appear in W-2 Boxes 1, 5, and 7, and your employer withholds tax on them.
- The No Tax on Tips deduction (up to $25,000) reduces federal income tax only, not FICA.
Which taxes apply to tips?
| Tax | Applies to tips? | Notes |
|---|---|---|
| Federal income tax | Yes | Taxed at your ordinary rates like wages; qualified tips may be deductible for 2025–2028 |
| Social Security (6.2%) | Yes | Up to the annual wage base; applies to tips you report to your employer |
| Medicare (1.45%) | Yes | On all reported tips |
| State income tax | Depends on your state | The federal deduction does not automatically apply to state taxes |
What counts as a tip?
According to the IRS, tips are discretionary payments customers voluntarily give for services. Cash tips include tips paid in cash or through a cash medium such as checks, credit cards, debit cards, gift cards, casino chips, and payment apps. Non-cash tips, such as event tickets, are also income but aren't reported to your employer. Amounts you receive from a tip pool are tips too (https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting). Mandatory service charges set by the business are wages, not tips (https://ttoccodes.com/blog/tips-vs-service-charges).
How tips get taxed step by step
- Keep a daily record of the tips you receive.
- Report cash tips to your employer in writing by the 10th of the month after you receive them, if they total $20 or more that month. No specific IRS form is required; Form 4070 is now historical.
- Your employer withholds income tax and your share of Social Security and Medicare from your wages and reported tips, and shows the tips in W-2 Boxes 1, 5, and 7.
- Report all tips on your Form 1040. Tips you didn't report to your employer, plus any allocated tips in W-2 Box 8, go on Form 4137 so you pay Social Security and Medicare tax on them (https://www.irs.gov/forms-pubs/about-form-4137).
If your wages are too small to cover the tax on your reported tips, you can give your employer money to cover it. Any tax still uncollected shows in Box 12 of your W-2 (codes A and B) and must be paid with your return.
How the No Tax on Tips deduction changes it
- Deduct up to $25,000 of qualified tips per year, for tax years 2025 through 2028.
- The deduction phases out once modified adjusted gross income (MAGI) is over $150,000, or $300,000 on a joint return.
- Qualified tips are voluntary cash or charged tips from customers, including tips received through tip sharing. Mandatory service charges don't count.
- The occupation must be on the IRS list of occupations that customarily and regularly received tips on or before December 31, 2024.
- You need a valid Social Security number, and married taxpayers must file jointly.
- It is available whether you itemize or take the standard deduction. You claim it on Schedule 1-A (Form 1040).
- It reduces federal income tax only. Social Security and Medicare taxes (7.65% for employees) still apply to tips.
For 2025 returns, you can use W-2 Box 7 (Social Security tips) or your own tip reports to your employer, plus any tips reported on Form 4137, to figure your qualified tips (https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025). Estimate yours with our calculator: https://ttoccodes.com/tools/tip-deduction-estimator .
Example
A server's 2025 W-2 shows $18,000 of Social Security tips in Box 7, the server works in a listed occupation, and MAGI is well under $150,000. The server can deduct all $18,000 on Schedule 1-A, so federal income tax on those tips is eliminated. The server still paid 7.65% FICA on the $18,000, which is $1,377.
Are credit card tips taxed differently from cash tips?
No. The IRS treats tips paid by credit or debit card as cash tips, the same as paper cash. Both are income, both must be reported to your employer once they reach $20 in a month, and both can be qualified tips for the No Tax on Tips deduction.
Do I pay Social Security tax on tips?
Yes. Tips you report to your employer are subject to Social Security (6.2%, up to the wage base) and Medicare (1.45%) taxes, withheld by your employer. Tips you don't report to your employer go on Form 4137, where you figure and pay those taxes with your return.
Does No Tax on Tips mean tips aren't taxed?
No. It is a deduction of up to $25,000 against federal income tax for qualified tips in listed occupations, and it phases out above $150,000 of MAGI ($300,000 joint). Social Security, Medicare, and possibly state income taxes still apply.
This article is general information, not tax advice. Rules can change; confirm your situation with the current IRS instructions linked above or a tax professional.