Tip recordkeeping and reporting

Tips are discretionary payments that customers voluntarily give to workers for services performed. All cash and non-cash tips received by workers are income and are subject to federal income taxes.

Tips include the following:

• Cash tips received directly from customers.
• Non-cash tips, such as event tickets or other items of value.
• Tip amounts received from other workers through tip pools, or other tip sharing arrangements (including amounts received by indirectly tipped workers).

Cash tips include tips that are paid in cash or in a cash medium of exchange, including checks, credit cards, debit cards, gift cards, tangible or intangible tokens that are readily exchangeable for a fixed amount (such as casino chips), and any other form of electronic settlement or mobile payment application that is denominated in cash.

If you are an employee

All tips received by employees are income. These amounts are subject to federal income tax and generally are also subject to Social Security and Medicare taxes. 

Employee responsibilities

Employees who receive tips have certain recordkeeping and reporting responsibilities.  In general, employees must do three things:

1. Keep a daily tip record.
2. Report all cash tips to the employer, unless the total is less than $20 per month from that employer.
3. Report all tips on the individual’s federal income tax return.

Keep a daily tip record

Employees must keep a daily record of tips received. The steps on how to keep a daily tip record are provided in Publication 531, Reporting Tip Income. You also need to keep a record of the date and value of any non-cash tips you get, such as event tickets, passes, or other items of value. Although you do not report these non-cash tips to your employer, you must report them as income on your individual income tax return (Form 1040).

Report cash tips to the employer, unless the total is less than $20 per month with respect to that employer

The Internal Revenue Code requires employees to report all cash tips received to their employer in a written statement, unless the total amount of tips received with respect to that employer are less than $20 for the calendar month.  No particular IRS form must be used. However, the statement must include:

• Employee signature.
• Employee name, address, and Social Security number.
• Employer name and address, including the establishment name if different.
• The month or period covered by the report.
• Total cash tips received during the month or period.

The employee may use any document that has the above elements. The steps on how to report your tips to your employer are provided in Publication 531.

Both directly and indirectly tipped employees must report tips to the employer.

Report all tips on an individual income tax return (even if you are eligible to claim the qualified tips deduction)

An employee must report all tips on their federal income tax return. If the employee did not report some of their cash tips to the employer, the employee must use Form 4137, Social Security and Medicare Tax on Unreported Income, to report those tips as additional wages on their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors, and to pay the employee share of Social Security and Medicare tax owed on those tips.

Service charges added to a bill by the employer and distributed to an employee are not tips.  The employer must treat service charges as wages and must include those amounts on the employee’s Form W-2, Wage and Tax Statement.  See section below for how to determine whether a payment is a service charge or a tip for purposes of claiming the qualified tips deduction.

When to report cash tips to your employer

Employees must report cash tips to the employer by the 10^th day of the month after the month the tips are received. For example, cash tips received by an employee in August are required to be reported by the employee to the employer on or before September 10 ^th of the following month. If the 10th falls on a Saturday, Sunday, or legal holiday, the report may be given to the employer by the next day, that is not a Saturday, Sunday, or legal holiday. An employer may require employees to report tips more than once a month; however, the statement cannot cover a period of more than one calendar month.

Reporting tips allocated by your employer

If the total tips reported by all employees at a large food or beverage establishment (as defined below) are less than 8 percent of the gross receipts (or a lower rate approved by the IRS), then the employer must allocate the difference among the employees who receive tips. If your employer allocated tips to you, then the allocated tips are shown separately in Box 8 (Allocated tips) of your Form W-2. They are not included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), or Box 7 (Social security tips) of your Form W-2.

Generally, you must report allocated tips shown on your Form W-2 on your income tax return. Attach Form 4137 to Form 1040 or Form 1040-SR, to report tips allocated by your employer (in Box 8 of Form W-2). Other cash tips not reported to your employer must also be reported on Form 4137. However, you do not need to report tips allocated to you by your employer on your federal income tax return if you have adequate records to show that you received less tips in the year than the allocated amount.

If you are a self-employed worker

As with employees, tips received by self-employed workers are also income.  Self-employed individuals such as certain hair stylists, rideshare drivers, or gig workers may receive tips directly from customers or through third party platforms. These amounts are generally included in the individual’s gross receipts and reported as business income on Schedule C (Form 1040). These amounts are subject to self-employment tax.

Qualified Tips Deduction

The One, Big, Beautiful Bill Act (OBBBA) added IRC 224 which provides a deduction for certain cash tips. Beginning in 2025, individuals may be able to deduct qualified tips when filing their federal income tax returns. This deduction applies to tax years 2025 through 2028. Tips must be reported on an information return furnished to the individual or reported by the employee on Form 4137 to claim this deduction.

Employees and self-employed individuals may only deduct qualified tips received in occupations that the IRS has identified as customarily and regularly receiving tips on or before December 31, 2024.  Visit Occupations That Customarily and Regularly Received Tips; Definition of Qualified Tips, for this list of occupations that customarily and regularly received tips on or before December 31, 2024. Tips eligible for the deduction must be:

• Reported on a Form W-2, Form 1099-NEC, Nonemployee Compensation, Form 1099-K, Payment Card and Third Party Network Transactions, Form 1099-MISC, Miscellaneous Information, or
• Reported directly by an employee on Form 4137.

Self-employed individuals are not subject to the employee tip reporting rules under section 6053, but they must maintain sufficient records to substantiate the amount of qualified tips claimed.

Qualified tips are voluntary cash tips received by an individual in an occupation that customarily and regularly received tips on or before December 31, 2024.  To claim the deduction, taxpayers must include an SSN (valid for employment) on the return, and married taxpayers must file a joint return.

The maximum annual deduction is $25,000 per return. The deduction is available whether or not a taxpayer itemizes deductions. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

For self-employed individuals, the deduction may not exceed the individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned. However, the deduction is not allowed for tips received in a specified service trade or business (SSTB) described in section 199A of the Code. For employees, this rule applies if the employee works for an employer that is in an SSTB. The IRS has provided transition relief related to this SSTB restriction. Specifically, until January 1^st of the first calendar year following the issuance of final regulations regarding the determination of whether a trade or business is an SSTB, the IRS will treat both employees and self-employed persons as not having received tips in an SSTB if the worker receives tips in an occupation that customarily and regularly received tips on or before December 31, 2024 (see link above for a list of these occupations).   

Employers and other payors must file information returns with the IRS (or Social Security Administration) and furnish statements to taxpayers showing certain cash tips received and the occupation of the tip recipient.

The IRS has provided transition relief for employers and other payors subject to the new information reporting requirements for tax year 2025 (see Notice 2025-62). Notice 2025-69 provides transition relief for tax year 2025 related to the new information reporting requirements and the SSTB limitation.

Service charges are not tips

Extra amounts charged to a bill, such as mandatory service charges, are not tips and are not eligible for the qualified tips deduction. Service charges (also referred to as “auto-gratuities”), when distributed to an employee, are generally treated as wages paid by the employer to the employee rather than tips paid by the customer.

A payment is a tip only if the customer voluntarily decides to pay it and determines the amount.

Examples of service charges include:

• Automatic charges added to a bill (for example, a mandatory 18% charge for large parties).
• Required gratuities included in a contract or invoice.
• Digital payment prompts that require a customer to select a tip greater than zero before paying.

If a customer voluntarily chooses to pay an additional amount, that additional amount is a tip and may be eligible for the qualified tips deduction.

For example, if a restaurant automatically adds an 18% service charge but the customer voluntarily adds an extra amount, only the additional voluntary amount is a tip.

Whether a payment is a tip for federal tax purposes depends upon the facts and circumstances. The fact that a business or worker describes a payment as a “tip” is not determinative. See Revenue Ruling 2012-18 and Treas. Reg. 1.224-1(c) for additional guidance.

Employer and other payor responsibilities

An employer has several responsibilities related to employee tip income, including recordkeeping and reporting requirements, collecting taxes on tips, filing certain forms and paying or depositing taxes.

Employers are required to retain employee tip reports. Employers are also required to withhold taxes (including income taxes and the employee's share of Social Security tax and Medicare tax) based upon wages and tip income received by the employee and must deposit these taxes. In addition, employers are required to pay the employer share of Social Security and Medicare taxes based on the total wages paid to tipped employees as well as the reported tip income. The employer reports this information to the IRS on the appropriate forms.

Tips reported to the employer by the employee must be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social security tips) of the employee's Form W-2. Enter the amount of any uncollected Social Security tax and Medicare tax in Box 12 of Form W-2. Employers must separately report the total amount of cash tips reported to the employer on Form W-2 (Box 12, code TP) and include the applicable Treasury Tipped Occupation Code(s) in Box 14b. For more information, see the General Instructions for Forms W-2 and W-3.

Other payors (including businesses paying independent contractors) must separately report tip income paid in the course of a trade or business to payees on Forms 1099-NEC, 1099-MISC and 1099-K, and include the applicable Treasury Tipped Occupation Code(s). Notice 2025-62 and Notice 2025-69 and provide transition relief from these requirements for 2025.

Employers must report income tax withheld, Social Security and Medicare taxes withheld from employee wages, and the employer share of Social Security and Medicare taxes on Form 941, Employer's Quarterly Federal Tax Return. Employers must also deposit these taxes pursuant to federal tax deposit requirements.

Most employers must also file  Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, and deposit those taxes. Only the employer pays FUTA tax as it is not withheld from the employee's wages.

Employer share of Social Security and Medicare taxes on unreported tips

If an employee fails to report tips to their employer, then the employer is not liable for the employer’s share of Social Security and Medicare taxes on the unreported tips until notice and demand for the taxes is made to the employer by the IRS. The employer is not liable to withhold and pay the employee share of Social Security and Medicare taxes on the unreported tips.

For more information on the section 3121(q) Notice and Demand, see Revenue Ruling 2012-18, which provides additional guidance on Social Security and Medicare taxes on tips.

Additional Medicare tax on tips

Beginning in 2013, a 0.9% Additional Medicare Tax applies to Medicare wages, and an employer is required to withhold this Additional Medicare Tax on any Medicare wages or Railroad Retirement Tax Act (RRTA) compensation it pays to an employee in excess of $200,000 in a calendar year without regard to the employee's filing status. Additional Medicare Tax is only imposed on the employee. There is no employer share of Additional Medicare Tax.

Wages and compensation subject to Medicare tax are also subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold. Tips are subject to Additional Medicare Tax withholding when combined with other wages or other RRTA compensation paid by the employer that exceed the $200,000 withholding threshold.

For more information, see Topic 560, Additional Medicare Tax.

Distributed service charges

Service charges distributed to employees must be treated as wages to those employees. The employer must keep a record of the name, address, and Social Security number of the employee, the amount and date of each payment and the amount of income, Social Security, and Medicare taxes collected with respect to the payment.

In an examination, the IRS may ask the employer to demonstrate how sales subject to service charges are distinguished from sales subject to tipping. Examiners may ask for Point of Sale (POS) records, such as their summary reports regarding their sales transactions. To further validate the employer's procedures, examiners may sample daily receipts and ask the employer to walk through a complete transaction, from the customer’s bill to the POS transaction or sales journal and trace it to payroll to verify how the distributed service charges were paid out to the employee.

Service charges retained by employer are income to the employer

Service charges are amounts required by an establishment as part of a customer’s bill, such as automatic charges for large parties or other mandatory fees. These amounts are income to the employer regardless of whether the employer distributes all or a portion of the service charges to employees. This is distinguished from "tips," which are amounts voluntarily paid by customers and for which the customer determines the amount. Tips are not amounts paid to the employer and are not included in the employer’s gross receipts.  See discussion above: Service charges are not tips.

An employer may distribute service charges or auto-gratuities to employees in any manner it chooses or may retain all or part of the service charges. Regardless of whether the service charges are distributed to employees, these amounts are gross income to the employer.

Note that the employer may be entitled to a business deduction regarding the service charges distributed to employees provided all the criteria for a business deduction under section 162 of the Internal Revenue Code is met.

Suggested tip calculations on customer's bill are not service charges

Businesses may include suggested tip calculations (for example, 15%, 18% or 20%) on a customer's bill. If the customer may choose any amount or leave the tip line blank, the payment is voluntary and is a tip rather than a service charge. See Revenue Ruling 2012-18 and Treas. Reg. 1.224-1(c)).

Example: Restaurant includes sample calculations of tip amounts beneath the signature line on its charge receipts for food and beverages provided to customers. The actual tip line is left blank. Jackie's charge receipt shows sample tip calculations of 15%, 18% and 20% of the price of food and beverages. Jackie enters the amount calculated at 15% on the tip line and adds this amount to the price of food and beverages to compute the total. Under these circumstances, Jackie was free to enter any amount on the tip line or leave it blank; therefore, Jackie entered the 15% amount free from compulsion. Jackie and Restaurant did not negotiate the amount nor did Restaurant dictate the amount. Jackie determined the amount of the tip and paid it voluntarily. The amount Jackie entered on the tip line is a tip and not a service charge.

Voluntary tip reporting programs

The IRS administers several voluntary tip reporting programs for employers and employees in various service industries, such as the restaurant industry and casinos. The program is designed to enhance tax reporting compliance through taxpayer education and cooperation instead of through traditional enforcement actions, such as tip examinations. In addition to helping taxpayers understand and meet their tip reporting responsibilities, participation in these programs may provide benefits for the employer and the employee.

Employers may enter into one of several types of voluntary tip reporting agreements with the IRS, including:

TRAC – Tip Reporting Alternative Commitment

TRDA – Tip Rate Determination Agreement

GITCA – Gaming Industry Tip Compliance Agreement

Voluntary tip reporting agreements are available through the Market Segment Understandings program. See Publication 3144, Tips on Tips (A Guide to Tip Income Reporting for Employers in Businesses Where Tip Income is Customary) PDF, for more information.

FICA tip credit

Employers may be eligible to claim the Federal Insurance Contributions Act (FICA) tip credit under section 45B for certain tips on which the employer paid Social Security and Medicare taxes.

The OBBBA amended section 45B to extend the credit beyond food or beverage establishments to include certain tips received by employees providing barbering and hair care, nail care, esthetics, and body or spa treatment services.

For more information about the FICA tip credit and how to calculate and claim the credit, see Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, and its instructions.

Employers who operate large food or beverage establishments

File Form 8027

An employer who operates a "large food or beverage establishment" must file Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips, to make an annual report to the IRS of their receipts from food and beverages and the tips employees reported to their employer. In addition, employers use Form 8027 to determine allocated tips for tipped employees. As an employer, you must file a Form 8027 for each large food or beverage establishment; therefore, some employers are required to file multiple Form 8027.

A food or beverage operation is a large food or beverage establishment if all of the following apply:

• Food or beverage operation is located in the 50 states or in the District of Columbia,
• Food or beverages are provided for consumption on the premises (other than fast food operations),
• Tipping of food or beverage employees by customers is a customary practice, and
• The employer normally employed more than 10 employees on a typical business day during the preceding calendar year (see the Instructions for Form 8027 to determine if you had more than 10 employees on a typical business day).

Allocating tips

If the total tips reported by all employees at a large food or beverage establishment are less than 8 percent of the gross receipts (or a lower rate approved by the IRS), then the employer must allocate the difference among the employees who receive tips. These "allocated tips" are computed and reported on Form 8027. Employers show allocated tips in Box 8 of the employee's Form W-2.  No income tax, Social Security or Medicare taxes are withheld on allocated tips.

Related

Withholding and reporting tips