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Workers in the United States who receive tips in restaurants, bars and other service businesses must comply with a key tax rule: report cash tips to their employer by the 10th day of the month following the month in which they were received, unless the monthly total from that employer is less than $20.
The Internal Revenue Service (IRS) states that these earnings are subject to federal taxes, so omitting them can create additional tax obligations.
What is the IRS rule for reporting tips
The IRS states that employees must report cash tips to their employer in a written statement before the tenth day of the month following receipt. For example, those who received tips during September must generally report them by October 10.
If the 10th falls on a Saturday, Sunday or federal holiday, the worker may submit the report on the next business day. In addition, the employer may require tips to be reported more frequently, as long as it follows the conditions established by the IRS.
There is an important exception: when cash tips received from the same employer total less than US$20 during the calendar month, it is not mandatory to report that amount to the employer under this rule. However, that does not mean the income is automatically tax-free.
Failing to report tips can create differences between the worker’s actual income and the amounts recorded with the IRS. If a person omits part of this income, they still have the obligation to include it in their federal return and pay the corresponding taxes. In addition, failing to comply can leave amounts unpaid and generate interest or possible penalties, depending on the circumstances.
What workers must do to avoid problems with their taxes
The IRS recommends keeping a daily record of tips received and complying with reporting obligations. This control helps compare actual income with the amounts reported to the employer and with the data used when filing taxes.
In short, employees must fulfill three responsibilities:
- Record tips daily: note how much they received and keep records of tips that were not in cash.
- Report cash tips to the employer: do so within the corresponding monthly deadline, except when the less-than-US$20-per-employer exception applies.
- Report all tip income: include it in the federal personal income tax return.
If a worker did not report part of their cash tips to the employer, they must still report them to the IRS. In certain situations, they must use Form 4137 to report that income and calculate the corresponding taxes.
Do all tips have to be reported to the IRS?
Yes. According to the agency, cash tips and non-cash tips are income subject to federal income tax. Therefore, workers must include them on their tax return, even if some did not have to be reported monthly to the employer.
The IRS notes that “All cash and non-cash tips received by workers are income and are subject to federal income tax”. This includes:
- Tips given directly by customers.
- Tips received via credit or debit cards.
- Tips distributed among employees through arrangements.
- Items of value given as thanks for a service.
The agency also notes that tips are subject to Social Security and Medicare taxes.
New federal deduction: are tips tax-free?
Not necessarily. Although from tax year 2025 certain workers may qualify to claim a deduction for qualified tips, that does not eliminate the obligation to record and report that income.
The IRS indicates that the deduction applies to tax years 2025 to 2028 and that it can reach an annual maximum of $25,000 (subject to eligibility conditions and established income limits). In addition, it only covers certain qualified tips and eligible occupations.
To claim it, the tips must meet the corresponding requirements and be properly reported or, where applicable, on Form 4137.