How Tips Are Taxed in 2026

All tips are taxable income in 2026 — cash, card, and tip-pool tips alike. Federal income tax and FICA apply, but workers in Treasury-listed tipped occupations can deduct up to $25,000 of qualified tips for 2025–2028. For example, a server with $18,000 in tips and $50,000 income saves about $2,160 in federal tax.

Every tip is taxable income — cash, card, or tip pool

The IRS treats all tips as taxable wages: cash left on the table, amounts added to a card, and your share of any tip pool. If you receive $20 or more in tips in a month from one job, you must report them to your employer by the 10th of the following month so tax can be withheld through payroll. Tips below $20 a month don't have to be reported to the employer — but they are still taxable income on your return. Unreported tips don't become tax-free; they're reported on Form 4137 and still owe income tax and FICA.

Service charges are not tips

An automatic 18% gratuity for a large party, a mandatory delivery charge, or a banquet service fee is a service charge, not a tip. The IRS treats service charges as regular wages, which matters twice: they follow normal payroll withholding, and they do not count as "qualified tips" for the new deduction. A tip must be voluntary — the customer decides whether to pay and how much.

FICA applies to every tip dollar

Social Security (6.2% up to the $184,500 wage base in 2026) and Medicare (1.45%) come out of reported tips just like regular wages, and your employer pays a matching share. On $18,000 of reported tips, FICA alone is about $1,377. No deduction changes this — which is the single most misunderstood part of the "no tax on tips" law.

The 2025–2028 tips deduction: up to $25,000

The One Big Beautiful Bill Act created a federal deduction of up to $25,000 per return for qualified tips, for tax years 2025 through 2028, per the IRS. Your occupation must be on the Treasury's list of roughly 70 occupations that customarily received tips — servers, bartenders, hairstylists, taxi and rideshare drivers, and more. The deduction shrinks by $100 for every $1,000 of modified AGI above $150,000 ($300,000 for joint filers), works with the standard deduction (no itemizing needed), and is claimed on Schedule 1-A. Married taxpayers must file jointly, and self-employed workers cannot deduct more than the net income of the business where the tips were earned. Estimate your own savings with our No Tax on Tips Calculator.

New for 2026: code TP on your W-2

Starting with tax year 2026, employers report qualified tips separately on Form W-2 in Box 12 under code TP (qualified overtime gets its own code, TT). The W-2 you receive in early 2027 should show the number you need for Schedule 1-A. For 2025, employers weren't required to break tips out, so filers reconstruct the figure from their own records. Either way, keep a daily tip log — it is also your only evidence if the W-2 figure looks wrong.

Why your hourly wage looks so low: the tip credit

Under federal law, employers may pay tipped employees a cash wage as low as $2.13 an hour and count up to $5.12 an hour of tips (the "tip credit") toward the $7.25 federal minimum wage. If your cash wage plus tips ever averages below the applicable minimum wage for a workweek, your employer is required to make up the difference. Many states are stricter: some set a higher tipped minimum, and a handful — including California and Washington — ban the tip credit entirely, so tipped workers there earn the full state minimum wage before tips. For taxes, none of this changes anything: the $2.13 cash wage and every reported tip are both taxable wages, and both show up in Box 1 of your W-2. It simply explains why a server's pay stub can show a tiny hourly rate while the real income arrives as tips — and why the new deduction, which targets exactly that tip income, matters so much for this workforce.

A worked example

A restaurant server earns $32,000 in base wages plus $18,000 in reported tips, single filer, in 2026. All $50,000 is taxable income as usual, and FICA applies to every dollar. At filing, the server deducts the full $18,000 of qualified tips (under the $25,000 cap, no phase-out below $150,000 MAGI). Their top dollars sit in the 12% federal bracket, so the deduction is worth about $2,160 in federal income tax. FICA on the tips (about $1,377) and any state income tax still apply. Overtime workers can stack the separate overtime deduction on top — see our guide on how overtime is taxed.

Do states tax tips?

Most states with an income tax treat tips as ordinary wages, and the federal tips deduction does not automatically flow through to state returns. A few states have proposed their own tip exemptions, but unless yours has passed one, expect normal state withholding. Check your state's take-home math with our state paycheck calculators.