Tip Income

If you earn tips as part of your job—whether in a restaurant, salon, delivery service, or other service role—those tips are considered taxable income by the IRS. Properly tracking and reporting your tip income is essential to avoid penalties and ensure your tax return is accurate.

This article explains:

• What counts as tip income 
• How to report tips to your employer
• How tips are reflected on your tax forms
• How to report tip income on your federal tax return

What Is Considered Tip Income?

Tip income includes any money you receive directly from customers for services. This can include:

• Cash tips
• Tips added to credit/debit card payments
• Tips received through tip-sharing or pooling arrangements
• Non-cash tips (such as gift cards or other items of value)

👉 Important: All tips are taxable, even if you don’t receive a tax form for them.

Reporting Tips to Your Employer

If you receive $20 or more in tips in a month, you are required to report those tips to your employer.

Why This Matters

When you report tips to your employer:

• Taxes (federal income tax, Social Security, and Medicare) can be withheld correctly
• Your employer includes your tips in your wages on your Form W-2

How Tip Income Appears on Your W-2

At the end of the year, your employer will include reported tips on your Form W-2:

• Box 1: Total taxable wages (includes reported tips)
• Box 7: Social Security tips
• Box 8: Allocated tips (if applicable—explained below)

What Are Allocated Tips?

If your employer believes you earned more tips than you reported, they may assign allocated tips in Box 8.

• These are not included in Box 1 automatically
• You must determine if you need to add them to your income when filing your tax return

Reporting Tip Income on Your Federal Tax Return

Step 1: Report Wages and Reported Tips

• Use your Form W-2
• Include the amount from Box 1 on Form 1040 (line for wages)

Step 2: Report Unreported Tips

If you did not report all your tips to your employer:

1. Calculate your unreported tips
2. Complete Form 4137 (Social Security and Medicare Tax on Unreported Tip Income)
   • Federal > Other Taxes
   • Social Security and Medicare Tax on Unreported Tip Income

Step 3: Handle Allocated Tips

If you have allocated tips (Box 8 of your W-2):

• Add them to your income only if they were actually earned and not already reported
• If you believe allocated tips are incorrect, keep records to support your claim

Recordkeeping Tips

To stay compliant and avoid issues:

• Keep a daily log of tips received
• Track:
  • Cash tips
  • Card tips
  • Tip-sharing amounts
• Save employer reports and pay stubs

No Tax on Tips

For information on the new 'No Tax on Tips' deduction, please see our article.