Tax Implications of Cash Tips vs Card Tips for Employers and Employees

As a seasoned small-business columnist, I've seen my fair share of tax headaches. But one of the most common issues I see is the misreporting of cash and card tips. The No Tax on Tips deduction (OBBBA) reduces federal income tax on qualified tips for tax years 2025–28, but FICA (7.65%) still applies. Cash tips of $20+ per month must be reported to the employer, while card tips are subject to the same reporting threshold.

What Are the Tax Implications of Reporting Cash Tips vs Card Tips?

For tax years 2025–28, the No Tax on Tips deduction (OBBBA) reduces federal income tax on qualified tips, but FICA (7.65%) still applies. This means that employees will only pay federal income tax on tips above the qualified threshold, which is $25,000 per year for most employees. However, the deduction phases out above $150,000 Modified Adjusted Gross Income (MAGI) for single filers and $300,000 MAGI for married filing jointly. The IRS requires employers to report TTOC (Treasury Tipped Occupation Codes) in W-2 Box 14b and Form 8027 for large food/beverage establishments, which must report tips of $20 or more per month. See "https://www.irs.gov/forms-pubs/about-form-8027" for more information.

The IRS also requires employers to report TTOC in W-2 Box 14b, which includes the total tips reported by employees for the year. This information helps the IRS ensure that employees are accurately reporting their tip income. See "https://www.irs.gov/forms-pubs/about-form-w-2" for more information.

How Do Card Tips Affect Tax Reporting for Employees?

Card tips are subject to the same reporting threshold as cash tips ($20+ per month) and must be reported to the employer. Employers use Form 4137 to report unreported tip income, which may trigger penalties and interest. Employees must accurately report card tips on their tax return, as underreporting can lead to penalties and interest.

A practical tip from my experience: make sure to report card tips on a separate line on your tax return, rather than lumping them in with cash tips. This will help avoid any potential audit issues down the line.

• Employers must report TTOC in W-2 Box 14b and Form 8027 for large food/beverage establishments.
• Employees must report cash and card tips to their employer, who will then report the information on Form 8027.
• Employers use Form 4137 to report unreported tip income, if applicable.

What Are the Steps for Reporting Cash and Card Tips?

Reporting cash and card tips requires the following steps:

1. 1. Employers must report TTOC in W-2 Box 14b and Form 8027 for large food/beverage establishments.
2. 2. Employees must report cash and card tips to their employer, who will then report the information on Form 8027.
3. 3. Employers use Form 4137 to report unreported tip income, if applicable.

What Are the Consequences of Not Reporting Cash and Card Tips?

Underreporting cash and card tips can lead to penalties and interest on the employer's and employee's tax returns. The IRS may impose penalties for failure to report TTOC or unreported tip income. Employers and employees must accurately report cash and card tips to avoid tax-related consequences.

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