Are tips taxed?

Yes, tips are taxed. Tips you report to your employer are wages, so Social Security, Medicare and usually state income tax apply, and federal income tax is withheld. For 2025 through 2028, you can deduct up to $25,000 of qualified tips on your federal return, which brings much of that income tax back.

Qualified tips must come from a job on the IRS list of jobs that customarily received tips before 2025. The $25,000 limit shrinks by $100 for each $1,000 of modified adjusted gross income over $150,000 ($300,000 joint). Cash tips must still be reported to your employer.

Take someone earning $15 an hour for 30 hours a week plus $300 in tips every two weeks. The deduction is $7,800 for the year and saves about $834 in federal tax for a single filer. Add tips in the hourly paycheck calculator, or see the tips and overtime guide and overtime FAQ.