Are tips taxed?

Updated October 8, 2026 · WageSignals

Tips are income, just like your wages. They are subject to federal income tax, Social Security (6.2%) and Medicare (1.45%): of every $100 in tips, $7.65 goes to FICA, plus federal income tax and your state's tax if it has one.

Calculate with my tips →

Which tips count

Cash tips from customers, tips left on a card that your employer passes on to you, and tips you receive from coworkers through a tip pool or tip-out.

A fixed service charge the customer is required to pay is not a tip: it is regular wages.

What you have to report

If you receive $20 or more in tips in a month, you must report them to your employer in writing by the 10th of the following month.

Under $20 a month you do not have to report them to your employer, but they are still income and go on your tax return.

Why your paycheck can look very small

Your employer withholds the taxes on your tips from the wages it pays you. If your base wage is low and you take your tips home in cash, the check can come out to almost nothing: the taxes on all your tips came out of it.

It is not a mistake. You already received that money in cash; the check only shows what was left after taxes.

Minimum wage for tipped workers

Federal law allows a direct wage of $2.13 an hour for workers who regularly receive more than $30 a month in tips, as long as tips bring them to at least $7.25 an hour. If they do not, the employer must make up the difference.

Many states require more, and some do not allow paying less than the full minimum. Tips belong to you: employers and managers may not keep any part of them.

What "no tax on tips" means

From 2025 through 2028 you can deduct up to $25,000 a year in qualified tips from federal income tax. The deduction is reduced if your income is over $150,000 ($300,000 if married filing jointly).

It does not raise your paycheck automatically and it does not affect Social Security or Medicare, which are still withheld. The benefit comes when you file your return.

Frequently asked questions

Are cash tips taxable?

Yes. Cash or card, tips are income and are subject to federal income tax, Social Security and Medicare.

What are allocated tips on my W-2?

Tips your employer assigned to you because the tips reported at a large restaurant were under 8% of sales. No tax was withheld on them, so they go on your tax return.

Can I calculate my paycheck with tips?

Yes. In the detailed estimate you add your tips for the period and see your take-home pay after taxes.

Official sources

General information, not tax or legal advice.