CashoutGlossary / Tip
Tip
Money a customer chooses to give a worker for service, in an amount the customer decides. All tips are taxable income, cash or card.
Under federal wage law, a tip is a sum a customer gives as a gift or gratuity in recognition of service, and whether to tip and how much are up to the customer alone. The IRS uses similar tests: the payment is made free from compulsion, the customer has the unrestricted right to set the amount, it isn't negotiated or dictated by employer policy, and the customer generally decides who gets it.
All tips you receive are income and subject to federal income tax. That covers cash, tips added on a credit or debit card, and your share from a tip pool or tip split. Once your tips from one job reach $20 in a month, you report them to your employer by the 10th of the next month, and Social Security and Medicare tax apply.
For 2025 through 2028, voluntary tips earned in a job on the IRS list of tipped occupations can also count toward the No Tax on Tips deduction, capped at $25,000. That deduction lowers federal income tax only, not Social Security or Medicare.
The common mistake is treating every line that says gratuity as a tip. A charge the restaurant adds on its own, like 18 percent for a large party, is a service charge. If it's paid to you, it's wages.
Related terms
Service charge · Cash tip · Credit card tip · Reported tips · Qualified tips
