Here is the quick answer to the question, “Are Tips Taxable?”: Yes. However, the Internal Revenue Service (IRS) provides a lot more information to go with the “yes” answer.
Exactly what is the definition of a tip?
Tips are payments that a customer gives an employee that are discretionary (optional or extra). Here are some examples of tips:
- Cash tips received directly from customers.
- Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.
- The value of any noncash tips, such as tickets, or other items of value.
- Tip amounts received from other employees paid out through tip pools or tip splitting, or other formal or informal tip-sharing arrangement.
The technical answer to, “Are Tips Taxable?”
- All cash and non-cash tips an employee receives are income and are subject to Federal income taxes.
- All cash tips received by an employee in any calendar month are subject to social security and Medicare taxes and must be reported to the employer unless the tips received by the employee during a single calendar month while working for the employer total less than $20.
Lots More Tip Income Information and Resources Provided Online by the IRS
- Interactive Tax Assistant Tool. The ITA tool is a tax law resource that asks taxpayers a series of questions and provides a response based on the answers. Taxpayers can use Is My Tip Income Taxable?.
- Show all tips on a tax return. Use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount of any unreported tip income to include as additional wages. This includes the value of non-cash tips such as tickets, passes or other items.
- Report tips to an employer. If employees receive $20 or more in any month, they must report their tips for that month to their employer by the 10th day of the next month. Include cash, check and credit card tips received. The employer must withhold federal income, Social Security and Medicare taxes on the reported tips.
- Keep a daily log of tips. Use Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record tips. This will help report the correct amount of tips on a tax return.
- For more on tips and taxes. See Tip Recordkeeping & Reporting and Publication 531, Reporting Tip Income.
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