There is no special tax percentage for tips. Tips are taxed like wages: at your ordinary federal income tax rate, plus 7.65% for Social Security (6.2%) and Medicare (1.45%). For 2025 through 2028, the No Tax on Tips deduction can remove federal income tax on up to $25,000 of qualified tips, but the 7.65% still applies.
Key takeaways
- Income tax on tips follows the same brackets as your wages: 10%, 12%, 22%, 24%, 32%, 35%, or 37%.
- Employees pay 7.65% FICA on reported tips (6.2% Social Security up to the wage base, plus 1.45% Medicare).
- Qualified tips up to $25,000 may be deductible from federal income tax for 2025–2028.
- State income tax on tips depends on your state.
The three pieces of tax on a tip
| Piece | Rate | Can No Tax on Tips remove it? |
|---|---|---|
| Federal income tax | Your marginal bracket (10%–37%) | Yes, for up to $25,000 of qualified tips (subject to the income phase-out) |
| Social Security | 6.2% (up to the annual wage base) | No |
| Medicare | 1.45% (plus 0.9% Additional Medicare on high wages) | No |
Your employer withholds these taxes from your pay based on the tips you report. Some employers withhold income tax on tips as supplemental wages at a flat rate, but withholding is only a prepayment. Your actual income tax is settled on your return at your ordinary rates.
How the No Tax on Tips deduction changes the percentage
- 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.
Example
Maria is a single bartender (occupation 101) with $30,000 of wages and $20,000 of qualified tips, and her MAGI is under $150,000. She can deduct the full $20,000 on Schedule 1-A, so none of her tips are subject to federal income tax. She still pays 7.65% FICA on the tips: $20,000 × 7.65% = $1,530.
Tips you don't report to your employer
If you don't report some cash tips to your employer, you still owe tax on them. Report them on Form 4137 with your Form 1040 to pay your Social Security and Medicare tax (https://www.irs.gov/forms-pubs/about-form-4137). You may also face a penalty equal to 50% of the Social Security and Medicare tax on tips you didn't report to your employer, unless you have reasonable cause (https://www.irs.gov/publications/p531). More details: https://ttoccodes.com/blog/not-reporting-tips-to-irs-consequences-and-penalties .
Is there a flat tax rate on tips?
No. Tips are taxed at the same federal income tax rates as your wages, from 10% to 37% depending on your total taxable income, plus 7.65% Social Security and Medicare. Some employers withhold a flat supplemental rate, but that's only withholding. The final tax is figured on your return.
Are tips taxed at a higher rate than wages?
No. Tips and wages go through the same tax brackets. Tips can feel more heavily taxed because withholding on them often comes out of a small hourly paycheck, but the rate is the same as on wages.
Do I pay tax on tips under $20 a month?
Yes, for income tax. You don't have to report cash tips under $20 in a month to that employer, and they aren't subject to Social Security and Medicare withholding, but they are still income and must be reported on your tax return.
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.