If you work in a job where you receive tips — think restaurants, salons, or hospitality — it’s important to know that tips count as income, and yes, they’re taxable. The IRS expects you to report them, and not doing so can cause trouble down the line.
But don’t worry — it’s not as complicated as it sounds. Here’s what you need to do.
✅ 1. Keep a Daily Tip Log
This helps you: – Accurately report tips to your employer – Stay on track for tax time – Have documentation in case the IRS ever has questions
You can use a simple notebook, spreadsheet, or even an app — just make sure to track: – Cash tips from customers or co-workers – Credit/debit card tips your employer pays you – Non-cash tips (like tickets or gifts) – Any tips you share with or receive from others
Many employers also offer electronic systems to log your tips — just be sure to save a printed copy for your records.
Important: Not everything that looks like a tip is a tip.
For example, if a restaurant adds a fixed “service charge” to a large party’s bill, that’s considered a wage — not a tip — and should already be included in your paycheck.
✅ 2. Report Tips to Your Employer
Each month, if you make $20 or more in tips at a single job, you need to report those tips to your employer by the 10th of the next month.
Only report the tips you keep — if you pass some along to others (like in a tip pool), you don’t report those. But you do report tips received from others.
Non-cash tips (like a pair of game tickets) don’t get reported to your employer, but they still count as income and need to go on your tax return.
✅ 3. Report All Tips on Your Tax Return
You’ll report all your tips — cash and non-cash — when you file your taxes.
If your employer gave you allocated tips (extra tips added to your W-2 in box 8), you’ll need to include those too, unless you have records showing you earned less.
If Social Security and Medicare taxes weren’t withheld on some tips (like allocated ones), you’ll need to file Form 4137 with your return to pay those taxes.
💡 New for 2025: Tip Deduction
There’s a new tax deduction of up to $25,000 for qualified tip income — a nice win if you report everything properly. This starts phasing out once your income hits $150,000 ($300,000 if married filing jointly).
If you’re self-employed, the deduction can’t exceed the net profit of the business where the tips were earned.
Questions About Your Tips or Taxes?
If you’re unsure how to track or report your tips — or whether you’re doing it right — don’t guess. Let’s talk through it and make sure you’re covered.
📞 Contact LP Tax & Bookkeeping Pros in Greenville, TX
Ralph Pinney | 303-881-9762