No tax on tips — sounds like a dream, right? Many people working in restaurants, salons, or any tip-based job wonder if this is true. You might think, “It’s cash, so I get to keep it all!” But is that really how it works? In this blog, we’re going to break it all down in a super simple way.
Let’s talk about what tips really are, how the IRS sees them, what kind of tips are taxed, and what rules you should follow.
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What Are Tips, and Why Do People Get Them?
Tips are extra money given to you by a customer for good service. They are not part of your regular paycheck. Many jobs depend on tips, especially in restaurants, bars, hotels, and hair salons.
If you’ve ever waited tables or delivered food, you already know — tips matter. In fact, some workers earn more in tips than in their regular hourly wage.
But just because it’s “extra,” that doesn’t mean it’s free from taxes.
Is There Really No Tax on Tips?
Here’s the truth: There is no such thing as no tax on tips — at least not legally.
The IRS says that all tips are income. That means they must be reported and taxed. Even if someone gives you cash, you’re supposed to count that as part of your income.
So, when someone says, “You don’t have to pay taxes on your tips,” they’re wrong. Or maybe they’re just confused.
Why Do People Think There’s No Tax on Tips?
There are a few reasons why this myth exists:
- Many tips are paid in cash
- Some employers don’t track tips
- Workers may not report small amounts
But just because something isn’t reported doesn’t mean it’s not taxable. The IRS expects you to report all tips — even if your boss doesn’t.
How to Report Your Tips
Let’s keep this simple. You need to report tips in two places:
- To Your Employer
If you make more than $20 in tips in a month, you must tell your boss. Most of the time, they’ll add the tips to your paycheck. Then taxes are taken out just like your normal wages.
- On Your Tax Return
At the end of the year, you report total tip income on your tax return. That includes cash tips, credit card tips, and even shared tips.
This helps you stay legal and avoid trouble.
What Kinds of Tips Are Taxed?
All tips are taxed. Yes, all of them. Here are the most common types:
- Cash tips – Yes, even if no one saw it happen
- Credit card tips – Your employer usually includes these
- Shared tips – If you split with coworkers, report your part
- Gifts as tips – If someone gives you a gift card or something of value, it may count as income
If you’re not sure whether something counts as a tip, it’s best to play it safe and report it.
How Much Tax Will You Pay on Tips?
Tip income is taxed just like your regular paycheck. That means:
- Federal income tax
- Social Security tax
- Medicare tax
- Possibly state income tax, depending on where you live
The more you make, the more you may owe. But reporting your tips can also help when you apply for loans, credit, or benefits — because your income looks higher on paper.
No Tax on Tips: Is There Ever an Exception?
Technically, if you earn less than $20 in tips per month, you don’t have to report it to your employer. But you still need to include it in your yearly tax return.
So in the end, even small tips are not totally tax-free.
What Happens If You Don’t Report Tips?
Skipping out on tip reporting might seem easy, but it can cause real problems:
- You could face IRS penalties
- Your employer might get in trouble too
- You may owe back taxes
- It might hurt your chances for loans or insurance
So, even though it might be tempting to pocket those extra dollars, it’s better to stay honest and safe.
How Can You Keep Track of Your Tips?
Here’s a simple system:
- Write down your daily tips in a notebook or phone app
- Total them each month
- Tell your employer if you make over $20 that month
- Keep everything saved for tax season
The IRS even has a free tip record form:
IRS Form 4070A – Employee’s Daily Record of Tips
Do You Need to Pay Estimated Taxes on Tips?
If your employer doesn’t withhold enough taxes from your paycheck (especially if you’re self-employed), you may need to pay estimated taxes every quarter.
This can help you avoid a big bill at the end of the year. It’s not fun, but it’s smart.
No Tax on Tips and Self-Employed Workers
If you work for yourself — like a hair stylist renting a booth or a food delivery driver — things work a bit differently.
You must report all tips and income yourself and pay:
- Income tax
- Self-employment tax
Again, it’s extra work, but it keeps you out of trouble and helps you in the long run.
FAQs About No Tax on Tips
- Is it true there’s no tax on tips under $20?
Only in one case — if you make under $20 in tips in a month, you don’t have to report them to your boss. But you still need to report them on your tax return.
- What if my boss doesn’t ask about tips?
You’re still responsible for reporting them. The IRS holds you accountable, not just your employer.
- Do I need to report tips I received in cash?
Yes. All tips are considered income, even if paid in cash. Cash tips are not tax-free.
- Can I get in trouble for not reporting tips?
Yes. The IRS can fine you, charge interest, and even audit you. It’s better to be safe and report everything.
- Do credit card tips count as income?
Yes. These are usually already tracked by your employer and added to your paycheck, so taxes are taken out automatically.
Conclusion
Even though the phrase “no tax on tips” sounds good, it’s not true. All tips — cash or card — are taxable income.
But don’t worry. As long as you track your tips, report them correctly, and pay your taxes, you’ll be fine.
Plus, reporting your real income can help with getting a car loan, renting an apartment, or even getting a mortgage one day.
So be smart, stay safe, and always keep good records.