How to Pay Taxes on Tip Income
Tipped income is income that is received from customers as a gratuity for services rendered. Tipped income does not include tips received from other employees, managing supervisors or by any other employer-sponsored tip pooling arrangement.
The Internal Revenue Service (IRS) requires employees to report all gratuities received on their annual tax return as taxable income. However, if your total annual gratuities received are less than $20, you are not required to report this income.
How are Tips Calculated through Pay Stubs
Tips are always included in your gross pay—the amount shown on your paycheck before taxes and other deductions. They’re also subject to Social Security and Medicare taxes, just like your regular wages. Your employer will withhold these taxes from your paycheck (and match them with their own contributions).
If you receive $20 or more per month in cash tips, report that income to your employer. Your employer will report your tip income on your W-2, Box 7 (Social Security tips).
If you’re self-employed or an independent contractor, report your tip income on your IRS Form 1040, Schedule C (Profit or Loss from Business) to determine your business income.
IRS Requirements for Tip Income
The IRS requires employers to withhold taxes on employee tips in the same way they do for regular wages.
If your tips don’t bring your total pay up to the minimum wage for the number of hours you worked, your employer must make up the difference.
If you were paid less than minimum wage including your tips, you can file a claim with your state labor department or with the U.S. Department of Labor’s Wage and Hour Division (WHD).
You may also be able to file a private lawsuit against your employer to recover the unpaid wages and an equal amount as liquidated damages plus attorneys’ fees and costs.
States where Waitress Tips are Taxable
- Alabama
- Arizona
- Colorado
- Florida
- Georgia
- Idaho
- Indiana
- Iowa
- Kentucky
- Michigan
- Mississippi
- Nebraska
- Nevada
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Oklahoma
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Virginia
- Washington
- West Virginia
- Wisconsin
States where tips are not taxable
- Alaska
- Arkansas
- California
- Connecticut
- Delaware
How to Calculate Taxes on Minimum Tip Wage
Calculating your income taxes based on your minimum tip wage and minimum wage is typically called the "tip credit." However, this is not the only way to calculate your income taxes in the restaurant industry. The other option is to calculate your income taxes using a percentage of your total sales.
Using a percentage of your total sales to calculate your income taxes has a few benefits. First, it allows you to deduct any tips that you earn from your total sales. This can help lower your overall tax liability. Second, it can help you keep track of your tips more easily. Finally, it can help you avoid under-reporting your tips to the IRS.
However, there are some drawbacks to using a percentage of your total sales to calculate your income taxes. First, it can be difficult to keep track of all of your tips if you receive them in cash. Second, if you do not report all of your tips to the IRS, you may owe back taxes, interest, and penalties.
Here is your guide to minimum tip wage vs. minimum wage
| State | Minimum Wage Rate | Maximum Tip Credit | Tipped Minimum Wage (Total) |
| Federal | $2.13 | $5.12 | $7.25 |
| Alabama | $2.13 | – | – |
| Alaska | $10.34 | – | $10.34 |
| Arizona | $9.80 | $3.00 | $12.80 |
| Arkansas | $2.63 | $8.37 | $11.00 |
| California | $15.00 | – | $15.00 |
| Colorado | $9.54 | $3.02 | $12.56 |
| Connecticut | $6.38 | $6.62 | $13.00 |
| Delaware | $2.23 | $8.27 | $10.50 |
| Florida | $6.98 | $3.02 | $10.00 |
| Georgia | $2.13 | – | – |
| Hawaii | $9.35 | $0.75 | $10.10 |
| Idaho | $3.35 | $3.90 | $7.25 |
| Illinois | $7.20 | $4.80 | $12.00 |
| Indiana | $2.13 | $5.12 | $7.25 |
| Iowa | $4.35 | $2.90 | $7.25 |
| Kansas | $2.13 | $5.12 | $7.25 |
| Kentucky | $2.13 | $5.12 | $7.25 |
| Louisiana | $2.13 | – | – |
| Maine | $6.38 | $6.37 | $12.75 |
| Maryland | $3.63 | $8.87 | $12.50 |
| Massachusetts | $6.15 | $8.10 | $14.25 |
| Michigan | $3.75 | $6.12 | $9.87 |
| Minnesota | $10.33 | – | $10.33 |
| Mississippi | $2.13 | – | – |
| Missouri | $5.58 | $5.57 | $11.15 |
| Montana | $9.20 | – | $9.20 |
| Nebraska | $2.13 | $6.87 | $9.00 |
| Nevada | $9.75 | – | $9.75 |
| New Hampshire | $3.26 | $3.99 | $7.25 |
| New Jersey | $5.13 | $7.87 | $13.00 |
| New Mexico | $2.80 | $8.70 | $11.50 |
| New York | $8.80 | $4.40 | $13.20 |
| North Carolina | $2.13 | $5.12 | $7.25 |
| North Dakota | $4.86 | $2.39 | $7.25 |
| Ohio | $4.65 | $4.65 | $9.30 |
| Oklahoma | $2.13 | $5.12 | $7.25 |
| Oregon | $12.75 | – | $12.75 |
| Pennsylvania | $2.83 | $4.42 | $7.25 |
| Rhode Island | $3.89 | $8.36 | $12.25 |
| South Carolina | $2.13 | – | – |
| South Dakota | $4.975 | $4.975 | $9.95 |
| Tennessee | $2.13 | – | – |
| Texas | $2.13 | $5.12 | $7.25 |
| Utah | $2.13 | $5.12 | $7.25 |
| Vermont | $6.28 | $6.27 | $12.55 |
| Virginia | $2.13 | $5.12 | $7.25 |
| Washington | $14.49 | – | $14.49 |
| West Virginia | $2.62 | $6.13 | $8.75 |
| Wisconsin | $2.33 | $4.92 | $7.25 |
| Wyoming | $2.13 | $5.12 | $7.25 |
How to Compute Waitress' Tips through Pay Stubs
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Create a Pay Stub
Integrate your gross pay, net pay and tips on your pay stub. If your employer is not giving you a pay stub you can generate your own stubs to keep track of older pay and then use these to prove your income.
Create a pay stub using our Easy Pay Stub Here
2. Get your W-2's from your Employer in Tax Season
If it's tax season, then request for your W-2 form from your employer. W-2's are great for tracking your overall income for a given period.
