Are Tips Taxable for 2025? Understanding the IRS Rules
With all the recent talk about ending federal taxes on tips, some wonder whether tips are taxable income.
Tips, the extra wages that many customer service workers rely on to make ends meet, aren’t free money. They must be reported to the IRS. This can include cash or noncash payments that the customer voluntarily makes in addition to regular service fees or costs.
Typically considered a gratitude sign for services, tips can be a critical income source for service workers, often earnning minimum wage. Suggested tip percentages now range from 5% to 30%.
However, since tips are subject to taxes, that limits service industry worker earnings.
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During the recent presidential election, the idea of exempting tips from federal taxes was proposed on both sides of the aisle and gained popularity among voters. Separately, Some states have also suggested ending tip taxes.
Given all of the confusion, here’s what you need to know about how tips are taxed in 2025.
What are tips?
Tips are optional payments a customer makes to a service provider and may be offered in different ways.
Tips may consist of the following payments:
- A cash tip received directly from a customer
- A monetary amount rendered through an electronic payment
- Non-cash tips, such as a ticket or coupon of monetary value
- Amounts received from other employees through tip pools, tip splitting, or other tip-sharing agreements
Are tips taxable?
Have you received at least $20 in tips for any calendar month of the year?
Then, yes, any tip amount at or above $20 is subject to federal income taxes because they are considered wages (aka: taxable income). Additionally, all cash tips received by an employee throughout the year are subject to Social Security and Medicare taxes and must be reported to your employer.
What counts as a cash tip? Cash tips include amounts received directly by customers and may include electronically charged tips (via credit or debit charges), literal cash, or amounts received by other employees under a tip-sharing arrangement. Workers must report cash tips to their employer.
What about non-cash tips? Tips delivered in another method that aren’t cash, but that have monetary value are considered noncash tips. These may include tickets to an event, coupons, and other goods of value that a customer may give an employee. Workers aren’t required to report noncash tips to their employer, however, they are still subject to federal income taxes.
What to do if you receive tips
If you receive tips, the IRS recommends you keep a daily record of all tips received.
As mentioned, tips are split into two categories: cash and non-cash tips. While non-cash tips don’t have to be reported to your employer, they still have to be reported as income on your tax return.
Cash tips must be reported to your employer by the 10th month following the month the tips were received.
While the IRS doesn’t require a particular form to report these earnings, when reporting cash tips to your employer the statement must include:
- Employee signature
- Employee’s name, address, and Social Security number
- Employer’s name and address (establishment name if different)
- The month or period the report covers
- Total tips received during the month or period
You can also use an IRS form that requires you to report the information mentioned, such as a Form 4070, Employee’s Report of Tips to Employer (available only via Publication 1244).
Tax Tip: Don’t include service charges as tips.
Service charges imposed on a customer’s bill are not considered tips. If you’re staying at a hotel, typical service charges may include cleaning fees, early booking fees, or security fees.
How to report tips on an individual income tax return
If tax time is upon you and you have unreported tips to your employer, you must complete an IRS Form 4137, Social Security Tax on Unreported Tip Income. Make sure to report any unreported tip income as additional wages on your Form 1040, Individual Income Tax Return, or 1040-SR, if you are an older adult.
What types of tips should I report on those forms? You should report non-cash tips earned throughout the year as well as any unreported cash tips to your employer.
At the same time, it’s your employer’s responsibility to include tip wages you’ve previously reported for the calendar tax year on your Form W-2. Some employers make sure to gather tip reports from their employees every month to avoid losing track of any extra wages earned by tax time.
Will tips become tax-free?
Some service industries such as hotel workers, waiters and waitresses, and bartenders largely depend on tips to make ends meet because their employers pay the minimum wage.
For instance, in Florida, the statewide minimum wage is $13.00 per hour in 2024. However, the minimum hourly wage for tipped employees is much lower – at just $9.98. For tipped workers, every penny counts to make a living wage.
Though the Sunshine State plans to raise the minimum wage annually through 2028, at their highest, tipped workers will have a starting wage of $13.98 in four years.
As reported by Kiplinger, during the 2024 presidential campaign, both Democratic nominee Vice President Kamala Harris and now-President Donald Trump proposed ending taxes on tips.
In summary:
- While some policymakers favor ending taxes on tips as it’ll allow employees to pocket more money, some critics argue that the exemption would result in a revenue shortfall of $150 billion to $250 billion over the next decade.
- Others theorize that the tipping debate will underscore another crucial topic: raising the minimum wage.
For the time being, taxes are still subject to tax at the federal level and in many states. However, stay informed in the upcoming months. It remains to be seen if Trump will revisit his promise to end taxes on tips during his new tenure.
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