What it is
The tax on tips refers to the requirement for employees to report all cash and non-cash tips received to their employer and to the IRS. These tips are considered taxable income and are subject to federal income tax, as well as Social Security and Medicare taxes (FICA). Employers are responsible for withholding these taxes from an employee's regular wages if sufficient, or the employee must pay estimated taxes.
Discussions about the tax on tips often arise in the context of labor policy, income reporting compliance, and the restaurant and service industries. Proposals to change how tips are taxed, such as making them tax-exempt, can be politically appealing to certain demographics. Such changes can affect the disposable income of service workers and the administrative burden on employers, influencing economic activity in those sectors.
Why it matters
Changes to how tips are taxed can directly impact the disposable income of service workers, affecting consumer spending and local economies.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice