Fact Check: Are tips taxed?

Are Tips Taxed?

The claim that "tips are taxed" refers to the taxation status of gratuities received by employees, particularly in service industries. This topic has garnered attention due to ongoing legislative discussions about potential changes to how tips are treated under tax law.

What We Know

Tax Obligations: According to the Internal Revenue Service (IRS), tips are considered taxable income and must be reported by employees. This includes tips received directly from customers, those added to credit card payments, and tips shared among employees. All tips must be included in the employee's gross income and are subject to federal income tax, Social Security, and Medicare taxes 2 10.
Reporting Requirements: Employees are required to report tips to their employers, which are then included on the employee's Form W-2 for tax reporting purposes. If an employee fails to report tips to their employer, they must report these separately on Form 4137 2.
Legislative Proposals: There are ongoing legislative efforts, such as the "No Tax on Tips Act" and the "Tax Free Tips Act," which propose changes to the taxation of tips. These bills aim to eliminate federal income tax on qualified tips, although they do not exempt tips from payroll taxes 5 6 8.
State Taxation: Many states conform to federal tax rules regarding income, which includes tips. If federal income tax on tips were eliminated, states would have to decide whether to follow suit, potentially complicating tax compliance for workers in states with income taxes 9.

Analysis

The assertion that tips are taxed is supported by multiple credible sources, primarily from the IRS, which is the authoritative body on tax matters in the United States. The IRS's guidance clearly states that tips are taxable and must be reported, making it a reliable source for understanding federal tax obligations 1 2 3.

However, the discussion around tips and taxation is evolving, especially with the introduction of new legislative proposals. The "No Tax on Tips Act" and similar bills could significantly alter the current tax landscape for tipped workers. These proposals are backed by certain lawmakers and organizations advocating for the interests of service workers, which introduces a potential bias in the presentation of these legislative changes 6 7.

The reliability of the sources discussing these legislative proposals varies. For instance, the Congressional Research Service (CRS) provides non-partisan analysis and is generally considered a credible source for understanding legislative impacts 4. In contrast, articles from advocacy groups may present a more biased perspective, focusing on the benefits of proposed legislation without fully addressing potential drawbacks or the implications of such changes 6 9.

Moreover, the methodology behind the proposed changes, such as the potential economic impacts on tax revenue and the implications for state tax systems, requires further examination. The effects of exempting tips from federal income tax could lead to significant shifts in tax policy and revenue generation, which are not fully explored in the available sources.

Conclusion

Verdict: True

The claim that tips are taxed is accurate, as the IRS explicitly states that tips are considered taxable income and must be reported by employees. Key evidence supporting this conclusion includes IRS guidelines that outline the tax obligations for tips, which encompass federal income tax, Social Security, and Medicare taxes.

However, it is important to note that the landscape surrounding tip taxation is subject to change due to ongoing legislative proposals aimed at altering how tips are treated under tax law. While these proposals may advocate for the elimination of federal income tax on tips, they do not exempt tips from payroll taxes, and their potential impacts on state taxation and compliance remain uncertain.

The available evidence primarily reflects the current tax obligations as defined by the IRS, but the evolving nature of tax legislation means that future changes could significantly affect how tips are taxed. Readers should remain aware of these developments and critically evaluate information regarding tax policies as they emerge.

Sources

Internal Revenue Service. "Tax tips for March 2023." IRS
Internal Revenue Service. "Tip income is taxable and must be reported." IRS
Internal Revenue Service. "Tip recordkeeping and reporting." IRS
Library of Congress. "Taxation of Tip Income." Congress.gov
Congress.gov. "S.129 - No Tax on Tips Act 119th Congress (2025-2026)." Congress.gov
Yale Budget Lab. "The “No Tax on Tips Act”: Background on Tipped Workers." Yale Budget Lab
Buchanan, Donald. "Buchanan, Donalds Introduce No Tax on Tips Act with Cruz." Buchanan House
Congress.gov. "H.R.8785 - Tax Free Tips Act of 2024 118th Congress (2023-2024)." Congress.gov
Tax Policy Center. "Tipped Workers, Their Income Taxes, and States." Tax Policy Center
Accounting Insights. "IRS Tip Reporting: Rules and Employer Duties Explained." Accounting Insights