Optional payments determined by a customer and given to an employee for providing a service is tip income. Tips are subject to Federal, Social Security and Medicare taxes. Taxable Tips include cash tips, non-cash tips, tips added to credit cards and shared tips.
Tip Income
Cash tips are directly from a customer. This also includes tips charged by credit card, debit card, gift card or any other electronic payment method.
If you received more than $20 in tips for the month, you should report it to your employer. That way you employer will properly withhold Federal, Social Security, and Medicare taxes.
Non-cash tips are tickets, passes or other items of value.
Splitting tips are when fellow employees divide tips to share a tip with other employees.
As an employee, you are responsible for keeping a record of tip income. It is recommended that you keep a daily record of cash and non-cash tips you received, as well as the value. If your tips don’t exceed $20, then you do not have to report the amount to your employer. Unless specified by your employer, no particular form must be used. You can write a statement and include the following and present it to your employer:
- Employee’s names, Address, Social Security Number
- Month or period (time frame)
- Total of tip income during the month or period
No Tax on Tips: The One Big Beautiful Bill
For tax years 2025 through 2028, a new “No Tax on Tips” deduction allows employees and self-employed individuals to deduct up to $25,000 in qualifying tips. This deduction is available to both itemizers and non-itemizers.
To be eligible, tips must be received in an occupation that the IRS defines as “customarily and regularly” receiving tips. The deduction begins to phase out for taxpayers with a modified adjusted gross income over $150,000 ($300,000 for joint filers). To claim the deduction, you must include your Social Security Number on your return and file jointly if married.
All tips must be properly reported on a Form W-2 or 1099.
