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Tipping concepts

Tip

Also called: gratuity

A voluntary payment from a customer to a service worker on top of the bill — taxable income whether in cash or on a card.

A tip is money a customer voluntarily gives a service worker beyond the price of the goods or services. For tax and labor law purposes, three things make a payment a tip:

  • The customer has the unrestricted right to choose the amount (or not pay at all)
  • The customer determines who receives the tip (no employer compulsion)
  • The payment isn't a service charge added by the establishment

All tips are taxable income — cash, credit card, and electronic. The IRS expects you to report 100% of tips received. Tips of $20 or more in a single month from a single employer must be reported to that employer by the 10th of the following month (using IRS Form 4070 or any equivalent log).

Tips are NOT subject to special tax rates — they're ordinary income taxed at your usual federal, FICA, and state rates. The myth that "you only have to report 8% of sales" comes from the IRS's allocated-tip rule, which is about the employer's reporting obligation, not yours.