Two different reporting rules: Employer vs. IRS
| Report tips to | Threshold | What’s required |
|---|---|---|
| Your employer | Total tips are $20 or more per month, per employer | Report the total by the 10th of the next month so taxes can be withheld |
| The IRS (your tax return) | No threshold—all tips | Include every dollar of tip income, even amounts never reported to an employer |
Source: IRS guidance on tip income
What counts as a tip you have to report
Tips that count as taxable income include:
- Cash handed to you directly
- Tips added to a credit or debit card
- Your share of tips from a tip-splitting arrangement with coworkers
- The value of non-cash tips, like event tickets
It doesn’t matter whether the tip came through your employer’s system or straight from a customer’s pocket.
What happens if you don’t report tips
All tip income is taxable and required to be reported, even cash tips that don’t show up on any form. If tips go unreported, the IRS has several ways to estimate what was actually earned, including bank deposit records and industry-average tip rates for similar jobs, and any gap between what was reported and what’s later calculated can mean owing:
- Back taxes
- Penalties
- Interest
Does the new ‘No Tax on Tips’ deduction change anything?
No—the new tip deduction doesn’t remove the requirement to report tips. You still have to report every dollar of tip income on your return. However, starting tax year 2025 and continuing through tax year 2028, eligible workers can deduct up to $25,000 of qualified tips when calculating their taxable income, which can reduce or eliminate the federal income tax owed on that reported amount.
To be considered a qualified tip, the tip must be voluntary. Service charges are not considered tips under the qualified tips deduction. This includes
- Automatic charges (18% for large parties)
- Required gratuities
- Digital payment prompts that require a tip greater than 0
Keeping a daily tip record
The easiest way to stay accurate is to log your tips as you earn them, whether in a notebook or a spreadsheet. A running daily record makes it simple to report the right amount to your employer each month and gives you documentation if your numbers are ever questioned.
