Do I Have to Pay Taxes on Tips I Earn?

Yes — all tips you receive in the course of your work are fully taxable income and must be reported, whether they're cash tips handed directly to you, tips charged on a credit card, or tips distributed from a tip-sharing pool. If you receive $20 or more in cash tips in a single month, you're required to report the total to your employer by the 10th of the following month using Form 4070, so that your employer can withhold the appropriate income taxes and payroll taxes from your regular wages. Tips that are included in your paycheck (because a customer put them on a credit card) will already be reflected in your W-2. At the end of the year, your employer will include all reported tips in Box 1 of your W-2. If your reported tips are less than 8% of your employer's gross receipts, the IRS may require your employer to allocate additional tip income to you, which also appears on your W-2. Unreported tip income doesn't disappear — the IRS can and does audit tipped workers, and failing to report tips can result in back taxes, interest, and penalties. Note: recent legislative proposals have sought to make some or all tips tax-free, so the law in this area may change.