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Are Tips Taxable?

Written by a TurboTax Expert • Reviewed by a TurboTax CPAUpdated for Tax Year 2024 • October 16, 2024 1:27 AM
OVERVIEW

If you're a restaurant server, bartender, barista, or other employee who makes tips, you should understand how those tips fit into your taxes.

Key Takeaways

  • Since the IRS views tips as taxable income, you are required to report all tips you receive as income on your tax return. This includes cash tips, electronic tips paid through credit, debit, or gift cards, and even non-cash tips.
  • Your employer is required to withhold taxes from both your wages and your tips, so if you earn more than $20 of tips in a one-month period, you’ll need to report your total monthly tips to your employer by the 10th of the following month.
  • The $20 threshold applies separately to each job you have. If you earn less than $20 in tips at one of your jobs, you do not have to report that amount to your employer, even if you earn more than $20 in tips at a different job.
  • If you share your tips with other employees, you only have to report the tips you keep.

Tax tips on tips

If you've started working as a food service employee, you might be wondering: Are tips taxable? The simple answer is yes, the IRS treats tips as taxable income. If you earn tips, then you're responsible for paying income, Social Security, and Medicare tax on that tip money.

Let's take a deeper dive into everything you need to know about tips and taxes.

How are tips taxed?

The IRS requires your employer to withhold enough funds from your wages to cover the income, Social Security, and Medicare taxes on both your hourly wages and your tips. But you are responsible for reporting your tips to your employer.

The amount withheld from your paycheck is based on the total of your wages plus the tip income you report, even if you receive the tips directly from the customer in cash. It's important for you to keep an accurate daily record of the tips you received so that you can report that amount to your employer every month.

Why are tips taxable and what is a taxable tip?

Tips are taxed because they are a form of income. Some tips are subject to Social Security and payroll taxes, and some are not. Tips that are required to be reported and taxed include:

  • cash tips totaling more than $20 in a one-month period
  • electronic tips paid through credit, debit, or gift cards
  • tips received from other employees that are paid to you through tip pools, tip splitting, or other tip-sharing arrangements

Tips that don't need to be reported

If you don't earn at least $20 in tips during the month, you don't have to report the tips to your employer. But you still need to include these tips in taxable income when you prepare your income tax return. If you work at more than one job, apply the $20 limit to each one.

Noncash tips, such as tickets or other valuable items, also don’t need to be reported.

Pooled or shared tips you pay to others

You can reduce the amount of your reportable tips if you share some of them with other employees. For example, if you receive a $125 tip and give the busser and bartender $35, then you only need to report $90 in tips.

Do I need to report "auto-gratuities" or surcharges?

Some employers may add service charges or large party charges to a customer's bill. The IRS doesn't consider these to be tips because the customer didn't choose who to pay or how much to pay. So, you don't need to report these charges as tips to your employer. Your employer will include the amounts you receive from those charges on your paycheck, so you'll be paying income, Social Security, and Medicare taxes on that income already.

TurboTax Tip:

You do not have to report service charges that your employer adds to a customer's bill, because these amounts will be included in your regular pay.

What work-related expenses can food service workers deduct from their taxes?

Beginning in 2018, unreimbursed employee expenses are no longer eligible for a tax deduction on your federal tax return unless you are itemizing. But some states continue to provide a deduction on your state tax return if you qualify.

If you don't take the Standard Deduction but instead choose to itemize, you may be eligible to deduct unreimbursed expenses that exceed 2% of your adjusted gross income. You need to have receipts for these expenses in order to deduct them:

  • work uniforms, if they're necessary for employment and you're not able to wear them for everyday use
  • classes, certifications, or licenses
  • tools and supplies you are required to use for work
  • transportation, meals and lodging needed for your job

Most food service workers are employees and not independent contractors. Generally, if the payer controls what work will be done and how it will be done, then the worker is an employee and not an independent contractor.

How do I report tips to the IRS?

The IRS requires you to report your total monthly tips to your employer by the 10th of the following month. If your employer doesn't have a process for reporting tip income, any staff member who has received tips can use Form 4070 to report those tips to the employer. But you don't have to use that form if the report you submit includes all of the following:

  • your name, address, and Social Security number
  • your signature
  • your employer's name and address
  • the month or period the report covers
  • the total amount of tips you received during that period

Your employer will pass along your figures to the IRS and take money out of your wages to cover tip withholding.

What if I have unreported tip income?

There are some cases where you may have unreported tip income when filing your income taxes. For instance, if you had months where your tips totaled less than $20 or if you received noncash tips from customers. To report these amounts, you'll fill out Form 4137. The form includes instructions for calculating the Social Security and Medicare tax you have to pay on your unreported tip income.

What are the potential penalties for failing to report tips accurately?

If you fail to report your tips to your employer, the IRS can impose a penalty equal to 50% of the Social Security and Medicare tax you fail to pay. And, if you didn't earn enough in wages and tips that your employer pays to you directly to cover your tax withholding, your W-2 will show how much tax you still owe. If the amount you underpay is significant, you have to pay estimated tax penalties after you file your tax return.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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  • More self-employed deductions: based on the median amount of expenses found by TurboTax Premium (formerly Self Employed) customers who synced accounts, imported and categorized transactions compared to manual entry. Individual results may vary.

  • TurboTax Online Business Products: For TurboTax Live Assisted Business and TurboTax Full Service Business, we currently don't support the following tax situations: C-Corps (Form 1120) and entities electing to be treated as a C-Corp, Trust/Estates (Form 1041), Tax Exempt Entities/Non-Profits, returns that require more than 5 state filings, and other issues unrelated to the preparation of a tax return or unrelated to business income/franchise taxes. TurboTax Live Assisted Business is currently available only in AK, AZ, CA, CO, CT, DE, FL, GA, ID, IL, KS, MA, MD, ME, MI, MN, MO, NC, NJ, NV, NY, OH, PA, RI, SD, TN, TX, UT, VA, WA, WV, and WY.

  • Audit Defense: Audit Defense is a third-party add-on service provided, for an additional fee, by TaxResources, Inc., dba Tax Audit. Audit Defense is included at no added cost with business returns filed with TurboTax Live Business (excluding Sole Proprietor). See Membership Agreements at https://www.intuit.com/legal/terms/ for service terms and conditions.

TURBOTAX DESKTOP GUARANTEES

TurboTax Desktop Individual Returns:

  • 100% Accurate Calculations Guarantee - Individual Returns: If you pay an IRS or state penalty or interest because of a TurboTax calculation error, we'll pay you the penalty and interest. Excludes payment plans. This guarantee is good for the lifetime of your personal, individual tax return, which Intuit defines as seven years from the date you filed it with TurboTax Desktop. Excludes TurboTax Desktop Business returns. Additional terms and limitations apply. See License Agreement for details.

  • Maximum Refund Guarantee / Maximum Tax Savings Guarantee - or Your Money Back - Individual Returns: If you get a larger refund or smaller tax due from another tax preparation method by filing an amended return, we'll refund the applicable TurboTax federal and/or state software license purchase price you paid. This guarantee is good for the lifetime of your personal, individual tax return, which Intuit defines as seven years from the date you filed it with TurboTax Desktop. Excludes TurboTax Desktop Business returns. Additional terms and limitations apply. See License Agreement for details.

  • Audit Support Guarantee - Individual Returns: If you receive an audit letter from the IRS or State Department of Revenue based on your 2024 TurboTax individual tax return, we will provide one-on-one question-and-answer support with a tax professional, if requested through our Audit Support Center, for audited individual returns filed with TurboTax Desktop for the current 2024 tax year and, for individual, non-business returns, for the past two tax years (2022, 2023). Audit support is informational only. We will not represent you before the IRS or state tax authority or provide legal advice. If we are not able to connect you to one of our tax professionals, we will refund the applicable TurboTax federal and/or state license purchase price you paid. This guarantee is good for the lifetime of your personal, individual tax return, which Intuit defines as seven years from the date you filed it with TurboTax Desktop. Excludes TurboTax Desktop Business returns. Additional terms and limitations apply. See License Agreement  for details.

  • Satisfaction Guarantee/ 60-Day Money Back Guarantee: If you're not completely satisfied with TurboTax Desktop software, go to refundrequest.intuit.com within 60 days of purchase and follow the process listed to submit a refund request. You must return this product using your license code or order number and dated receipt. Desktop add-on products and services purchased are non-refundable.

TurboTax Desktop Business Returns:

  • 100% Accurate Calculations Guarantee - Business Returns: If you pay an IRS or state penalty or interest because of a TurboTax calculation error, we'll pay you the penalty and interest. Excludes payment plans. You are responsible for paying any additional tax liability you may owe. Additional terms and limitations apply. See License Agreement  for details.

  • Maximum Tax Savings Guarantee - Business Returns: If you get a smaller tax due (or larger business tax refund) from another tax preparation method using the same data, TurboTax will refund the applicable TurboTax Business Desktop license purchase price you paid. Additional terms and limitations apply. See License Agreement  for details.

  • Satisfaction Guarantee/ 60-Day Money Back Guarantee: If you're not completely satisfied with TurboTax Desktop software, go to refundrequest.intuit.com within 60 days of purchase and follow the process listed to submit a refund request. You must return this product using your license code or order number and dated receipt. Desktop add-on products and services purchased are non-refundable.

TURBOTAX DESKTOP DISCLAIMERS

  • Installation Requirements: Product download, installation and activation requires an Intuit Account and internet connection. Product limited to one account per license code. You must accept the TurboTax License Agreement to use this product. Not for use by paid preparers.

  • TurboTax Desktop Products: Price includes tax preparation and printing of federal tax returns and free federal e-file of up to 5 federal tax returns. Additional fees apply for e-filing state returns. E-file fees may not apply in certain states, check here for details. Savings and price comparison based on anticipated price increase. Software updates and optional online features require internet connection. Desktop add-on products and services purchased are non-refundable.

  • Fastest Refund Possible: Get your tax refund from the IRS as fast as possible by e-filing and choosing to receive your refund by direct deposit. Tax refund time frames will vary. The IRS issues more than 9 out of 10 refunds in less than 21 days.

  • Average Refund Amount: $3,207 is the average refund amount American taxpayers received in the 2024 filing season based upon IRS data as of February 16, 2024 and may not reflect actual refund amount received.

  • TurboTax Technical Support: Customer service and technical support hours and options vary by time of year.

  • Deduct From Your Federal Refund: Individual taxes only. Subject to eligibility requirements. Additional terms apply. A $40 Refund Processing Service fee applies to this payment. method. Prices are subject to change without notice.

  • Data Import: Imports financial data from participating companies; Requires Intuit Account. Quicken and QuickBooks import not available with TurboTax installed on a Mac. Imports from Quicken (2022 and higher) and QuickBooks Desktop (2023 and higher); both Windows only. Quicken import not available for TurboTax Desktop Business. Quicken products provided by Quicken Inc., Quicken import subject to change.

  • Live Tax Advice: Access to tax experts to obtain answers to tax questions and to assist with tax year 2024 return(s) prepared with TurboTax Desktop software. Additional fees apply. Must be purchased and used by October 31, 2025. Excludes TurboTax Desktop Business. See License Agreement for details.

  • Audit Defense: Audit Defense is a third-party add-on service provided, for a fee, by TaxResources, Inc., dba Tax Audit. See Membership Agreements at https://turbotax.intuit.com/corp/softwarelicense/ for service terms and conditions.

All features, services, support, prices, offers, terms and conditions are subject to change without notice.

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